By BOB STOFFEL, senior vice president for strategy, engineering and supply chain at UPS
When you consider the current economic instability and the volatility of the credit markets, perhaps the most important element of risk--and the ability to mitigate risk--is the financial soundness of the partners you are dealing with.
As supplier weakness permeates the marketplace, we're already seeing a rise in supplier bankruptcies. More than 4,000 toy manufacturers went out of business in China last year. Standard & Poor's reports that the corporate bond default rate, a leading indicator of business bankruptcies, was up 377 percent in January versus the prior year.
Companies will need to re-evaluate their supply chains to identify, support their key partners and reduce the number of potential "weak link" suppliers. Companies need to "be nosy" with their suppliers--performing financial audits if they haven't already done so.
The auditing of suppliers should take place at the base level (credit ratings and basic financial information), and companies should more deeply investigate higher-risk suppliers or those that provide critical materials that would be difficult to replace. Suppliers that are a sole source of materials or components should receive extra scrutiny and companies should consider adding additional suppliers to minimize the chance for disruption.
New global challenges continue to make supply chain management more complex. In these volatile times, risk management has never been more critical. Continuity of suppliers is critical to success, so monitoring their health should be a primary concern for any business.
April 15, 2009
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