Managing Supply Chain Risk During a Recession

Managing Supply Chain Risk During a Recession | Risk & Insurance It's not easy to keep global supply chains running smoothly even in the best of times. But now, as many of the world's economies sink into a recession and the financial crisis deepens, supply chains are likely to come under even greater stress.

By KATHLEEN ELLIS, senior vice president and head of the Multinational Risk Group at Chubb

In a survey of 273 executives from around the world in June 2008, more than three-quarters of the respondents said the degree of supply chain risk their companies face had increased in the past five years.

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Executives surveyed in The McKinsey Quarterly study pointed to the greater complexity of products and services, higher energy prices and increasing financial volatility as top factors influencing their supply chain strategies. In the past, the weak links in the supply chain were often found in suppliers in emerging markets or other less-than-stable economies around the world. This is no longer the case.

The global scope of the financial crisis means that companies cannot be complacent about any of their suppliers in any part of the world. Suppliers are suffering through the same challenges as the rest of the corporate world, and the downturn in the economy will force some out of the business. As the business world found out this past year, even the biggest corporations are not immune from the potential for failure.

A company that does not have a supply chain contingency plan in place could quickly find its own operations in jeopardy if one of its suppliers goes out of business.

Supply chain risk, however, goes beyond just the outright loss of a critical supplier. Companies also may find their suppliers falling behind on production schedules or see a decline in quality standards if their suppliers are under pressure to cut costs by reducing staff or skimping on the quality of raw materials or on inspection processes.

Supply chain disruptions and a decline in quality standards could lead to lost orders, negative publicity, loss of revenue and product liability lawsuits.

SUPPLY CHAIN SOLUTIONS

Companies can take a number of steps to manage these risks and safeguard their supply chains. Consider the following:

1. Perform a full risk analysis and evaluate all of the business risks to the supply chain. These include workforce volatility, catastrophe exposures, political risk, infrastructure risk and regulatory exposures.

2. Evaluate vendors regularly and know where the critical links are in the company's supply chain. Many companies will focus on the suppliers of highly specialized products because there may be few alternative suppliers. But companies should not overlook the risk of losing a vendor that makes basic, and yet essential, products. The loss of either could result in a significant supply chain disruption.

3. Identify backup vendors and screen them ahead of time so that they can be brought on board quickly if there is any problem with the main supplier.

4. Look for early warning signs that a supplier may be in trouble, such as poor financial results, negative news or frequent layoffs. Other clues include failure to meet production deadlines and shipment delays.

5. Understand vendors' quality control processes and practices. Make sure vendors share the company's core values. Engage a third-party auditor to help monitor quality standards of vendors in distant locations.

NO CORNER CUTTING ALLOWED

Companies also need to maintain the resources needed to conduct the appropriate due diligence of their vendors.

In today's troubled economy, some companies may be tempted to save money by cutting corners on supply chain management and the oversight of vendors. This, however, could put the company's entire operation at risk.

Now, more than ever, companies need to maintain best practices in evaluating vendors, including making sure vendors have appropriate insurance and are not cutting back to save costs. Request vendors for notification should any changes occur in their circumstances or the circumstances of their vendors

Adequate measures must also be taken to compensate for the loss of control and transparency when dealing with layers of vendors and subcontractors.

It would also be wise for companies to evaluate their own insurance carrier and make sure the insurer will be able to provide the products and services needed. The insurer should have global reach and be able to provide guidance about supply chain risk management and loss control.

These are trying times for many companies, and troubles are bound to appear along the way for both suppliers and their customers. But by recognizing the risks and developing a plan to manage them, companies can go a long way in avoiding serious supply chain disruption.

January 8, 2009

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