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Managing Today’s Supply Chain Risk

October 15, 2008

“Forecasts emanating from market economists are suggesting a surge in bankruptcies in the coming months and through next year. Today, we are completely blind to the risk that exists within our supply base. So with the likelihood that there will be supplier organisations facing financial difficulties, I’d like to get some advice on how IACCM could assist us to develop an approach to supply risk management and the tools and methodology we should be considering in the design of our solution.”

 

This request is typical of a growing number hitting my mail box. My reply appears below. There is no quick fix, though there are short-term steps that can reduce both probability and consequence of failures.

 

You are of course right that this is a major topic for every organization right now and many are not well prepared to make the necessary risk assessments – nor for determining what they will then do once the risk has been identified.

 

In the end, the assessment options are fairly limited.

 

Companies that have strong SRM programmes are probably best placed, because these mean that they have identified critical / strategic suppliers (especially sole source situations) and are likely to have built-in relationship review procedures.

 

A second tier of companies have some level of on-going financial monitoring, whereby they do at least check the published accounts and credit ratings for their top-tier supplies. Some have outsourced or off-shored this activity – and that might offer a rapid way to improve your own situation.

 

Whatever method has been adopted, the challenge in current market conditions is that even healthy companies may be challenged either for cash, or because of the weakness of their supply or customer base.

Inevitably, some may see massive erosion of revenue based on their exposure to specific industries. However, at a minimum, you should urgently assess any sole-sourced agreements anddetermine the time and difficulty of either replacing or dual-sourcing those suppliers.

 

But moving beyond the question of risk, we get to the challenge of a solution. If you identify potential failure or weakness, what do you do about it?

 

Obviously many will look to potential switch to stronger suppliers (but the stronger supplies may not have capacity because others will do the same), encourage mergers (but that takes time), consider a dual or multi-sourcing policy, or purchase increased buffer stock. Beyond this, depending on your own financial strength, there may be situations where you consider funding or otherwise supporting your supplier, for example as a guarantor or through more generous payment terms, or even through taking some stake in their business. Finally, you might consider in some situations bringing the activity in-house.

 

This is a very high level summary of what I am hearing and seeing. IACCM could certainly pull together some sort of forum – physical or virtual – to enable a sharing of experiences and techniques. Of course, whatever solution you adopt, it will demand some combination of extra resource and money.”

 

 

One Comment
  1. thanks for the information

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