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Although supply chain risks have always been present, they are being exacerbated by two forces: the move to leaner supply chains holding less inventory and the move to increased outsourcing. Trade disruption assessments, contingent business-interruption insurance, supplier contracting and other aspects must take into account these changed conditions.

Leaner supply chains. Many enterprises have moved to leaner, just-in-time supply chains that hold less inventory and operate on tighter timetables than before. This is resulting in less "buffer" to absorb supply chain disruptions and delays.

In addition, many manufacturers are finding that their customers are also going to leaner operations and are increasing their expectations for the manufacturers' supply chain responsiveness and resiliency. Many manufacturers are experiencing intensifying demands by customers who want to see detailed business continuity plans, as well as proof of product liability and other types of risk insurance coverage.

Increased outsourcing. Companies continue to outsource more activities to suppliers, contract manufacturers, logistics service providers and other supply chain partners. The result is that much of a company's supply chain risk no longer resides within its four walls.

With outsourcing, a host of insurable and uninsurable risks need to be assessed and addressed. Even though the activity is no longer being performed in a company's own facilities, a company is still exposed to the impact of disruptions, reputation issues and legal liabilities.

Hidden interdependencies can unexpectedly paralyze your operations, such as discovering--too late--that multiple of your suppliers are sole sourcing from the same component parts or raw material vendor, which has just gone bankrupt or been hit by a tornado.

Increased international sourcing is intensifying risks. As companies continue to move production and supply sources to lower-cost locations like China and India, risk issues are being exacerbated because longer supply chains create more chances for delays, disruptions, product diversions, IP theft, product contamination and so on.

These longer, more volatile supply chains also create margin risks for enterprises. Many companies find their expected sourcing savings from lower-cost areas to be significantly eroded by unanticipated supply chain volatility, leading to increased safety stock requirements, expensive transportation expediting costs, more quality-control expenditures and so on.

Rising commodity and energy prices and shortages, combined with currency volatility such as the dip in the U.S. dollar, are intensifying pricing risks. These risks will only heighten as emerging market nations grow stronger and consume more in their local economies.

BETH ENSLOW is a senior vice president in the Supply Chain Risk Practice at Marsh Inc. She has more than 20 years experience advising companies on physical and financial supply chain optimization and related risks. Her previous positions include running the supply chain and global trade research practices at Aberdeen Group and Gartner.

(Find the complete Marsh supply chain survey report here.)

April 15, 2008

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