As the sluggish economy continues to take a heavy toll on manufacturing, global corporations are stepping up scrutiny of the integrity and resiliency of their complex supply chains.
“Supply chain risk and supply chain risk management are becoming increasingly important in today’s market,” Brian Bilsback, a director at PricewaterhouseCoopers, said during a March 17 Webcast on the subject. “We’re really seeing this area emerging across the globe.”
Atkinson
Supply chains “are under tremendous stress” due to market disruptions, said Joe Atkinson, a principal with PwC who also spoke during the Webcast. Suppliers might go out of business; regulators might order you to cease working with a partner that dabbles in corruption; product quality might suffer from someone who proves unreliable. Especially for large companies managing thousands of complex global supply chains, any one of those issues can create a disruption, Atkinson stressed.
One stark example from current headlines is Toyota Motor Corp., whose auto recalls have brought its supply chain to a halt. The company isn’t alone; in a poll of more than 400 participants during PwC’s Webcast, 25 percent reported experiencing a supply chain disruption. Another 19 percent said they experienced an “event” but wouldn’t characterize it as a significant disruption.
Regardless, Atkinson said, the numbers tell a cautionary tale, since the market “is quick to punish companies that report supply chain disruptions.” He cited findings from a PwC survey of 600 companies that experienced supply chain disruptions from 1998 to 2007. In that study, two-thirds of affected companies lagged their peers in stock price performance a full year after the disruption. The average return on assets and return on sales also fell four and five percentage points, respectively. “That impact can have a lasting effect on the performance and value of the organization,” he said.
Experts also noted that most companies continue to use traditional supply chain risk management approaches that don’t necessarily work in today’s economic climate. Traditional risk management programs focus on cost, supplier reliability, and product quality, Atkinson said, when today it should be about developing a “comprehensive supply chain risk profile,” based on a combination of financial metrics as well as current and expected operational metrics.
“The concerns of your supply chain and readiness to respond is what the management of this risk is all about.”
—Joe Atkinson,
Principal,
PricewaterhouseCoopers
In addition, rather than responding to problems after they occur, companies should be focused on leading risk indicators to better identify early signs of possible supply interruptions, Atkinson said. Specifically, study a supplier’s risk of ethical lapses and its risk of operational failures that could harm its financial stability.
Bilsback also urged companies to consider where they do business and the geopolitical or geographical risks that might be part of that. The recent earthquakes in Haiti and Chile, for example, are telling reminders of that risk. True, events like earthquakes can’t be controlled, but ultimately, Atkinson said, “the concerns of your supply chain and your readiness to respond is what the management of this risk is all about.”
Wider Views
Traditionally, companies and suppliers concentrate on what they perceive as their own issues, ignoring nascent risks and opportunities elsewhere in the supply chain, Atkinson said. Aligning the objectives of corporation and its supplier can help reduce those emergent risks and illuminate new opportunities.
Goldbach
“Follow a process where you’re selecting the right partner, not the right vendor,” advised Glen Goldbach, another PwC director. “The strength of your chain is really based on the weakest link.”
That means companies shouldn’t shy away from giving potential suppliers a tough financial review before entering a partnership, Bilsback said. Many suppliers are “here today, gone tomorrow, and without any kind of early warning, you’re reacting to a bankrupt situation,” he warned.
A lot of suppliers today will disclose their financial performance to customers or otherwise disclose it publicly. When they don’t, it’s incumbent on corporations to dig up as much details as possible themselves. “Think of yourselves more as detectives and sniffing out the signs and the indicators,” Bilsback said. A few possible clues: Companies with financial difficulties will take longer to obtain raw materials; they might start cutting corners on quality; they might switch auditors to find a firm that will give them an easier time.
SUPPLY CHAIN COMPONENTS
Major steps companies should take to improve their supply chain operations:
People:
Define roles and responsibilities
Establish appropriate
performance metrics
Embed new approach to
supplier management within
company culture
Training and change
management
Define workflow and response
protocols, based on outputs from
the risk dashboard
Process:
Identify potential risk events
Gather, aggregate, and analyze
risk information
Develop appropriate responses
Monitor effectiveness and
efficiency of risk responses
Take corrective action, as
necessary
Technology:
Aggregate data from internal and third-party sources
Leverage communication infrastructure
Develop analytical tools and techniques
Build logic for data normalization and consolidation
Develop presentation layer (e.g., dashboarding, portfolio view of
risk, etc.)
Source
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align="left">PwC Webcast on Supply Chain Management (March 17, 2010).
Lawsuits, even those that appear frivolous or harmless, can also indicate a potential financial problem. Asbestos problems in plants, for instance, have been known to cause major financial distress on more than one occasion, Goldbach said. He also advised creating a set of standard thresholds that would prompt you to do more rigorous due diligence of suppliers. They could be standards such as how liquid the market is, or how much money your corporation spends with the supplier in question.
“If you try to apply the deep dive on every one, you’re going to go bankrupt yourself trying to manage the external risks,” Goldbach added. Or, as Atkinson put it: “You’ll run out of resources long before you run out of risk.”
Bilsback
Bilsback also urged corporations to think of their supply chain risks in terms of what would hurt shareholder value the most. For example, what sort of disruption would hit your most important products or brands? Which product lines drive the most sales, and which suppliers are part of that production line? “Use that to guide your thought process,” he said.
Supply chain management isn’t just about managing the physical flow of material through the supply chain, but also the information flow of employees. “I can’t tell you how many times I’ve walked through and talked to people on the plant floor, who knew something was up … but it wasn’t showing up within our own intelligence in the company,” Goldbach said. Better management of supply chain risk is not an individual way of thinking, but a cultural way of thinking, he stressed.
The core message is that if you’re not thinking broadly about supply chain management, “the likelihood is that you’re going to missing some significant risks,” Atkinson said. “At the end of the day, that holistic view is necessary.”
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