As economy falters, importance of supplier risk management rises
The amount of risk involved in global supplier management appears to be increasing, according to recent surveys from AMR, Panjiva, CVM Solutions and MFG.com. Categories of risk are shifting, and overall level of risk is rising.
Roberto Michel, senior contributing editor -- Manufacturing Business Technology, 7/21/2009 10:58:00 AM
The amount of risk involved in global supplier management appears to be increasing, according to recent surveys from analysts and vendors. And it's not just the categories of risk that are shifting, but the overall level of risk is rising, say experts such as Noha Tohamy, a VP with Boston-based analyst firm AMR Research.
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AMR has been conducting quarterly supply risk surveys for more than a year. The firm's data for the second quarter of 2009 show that some of the risks that were top of mind a year ago, such as high fuel costs and volatile commodity prices, have given way to supplier failure, product quality, and lower consumer spend as increasing concerns.
"We are now seeing supplier failure back on top," says Tohamy. "This is in indication that most supply chains are going back to basics. So, at the end of the day, if you don't have a good solid supplier base, then obviously your supply chain is at risk."
AMR's surveys also show growth in the level of concern across several categories says Tohamy, not just a shifting from one top risk to the next. "I think [global supply management] is getting riskier," she says. "If you compare this year's [quarterly findings] to last year's, the magnitude of the risk is getting higher."
Other recent surveys also point to some alarming trends. Among these findings:
• The percentage of significant manufacturers on a "watch list" from Panjiva, a vendor of information and analysis for supplier risk management, edged up from 30 percent in March to 31 percent in April. Panjiva generates the list by analyzing U.S. customs data to gauge shipment trends to U.S. buyers.
• CVM Solutions, a supplier risk management software vendor, analyzed supplier data from five enterprise customers in the auto industry, and found that 7.3 of their suppliers were considered common suppliers. In a broader study of CVM's "Master Supplier Database," the vendor identified a core set of 10,500 suppliers that are recipients of 80 percent of procurement spending by Fortune 500 companies. According to CVM, this trend concentrates and multiplies risks posed by supplier failure.
"With common suppliers, if one supplier becomes risky, the risk is spread across many customers, not just one or two," says Jon D. Bovit, a VP with CVM. The trend is bad in another sense, contends Bovit: Access to fewer suppliers means less choice and leverage for buyers.
Josh Green, CEO of Panjiva, says Panjiva's watch list looks for foreign suppliers who are experiencing more than a 50 percent drop-off in shipments to U.S. buyers, thus indicating a significant drop in business. An inverse analysis to this combs data on suppliers' sales to see which ones are experiencing spikes in orders, which could make it harder for them to deliver on time.
Green agrees that global supply risks are multiplying, not just shifting, though awareness also plays a role in the attention being given risks. "A big part of what is going on right now is that we are more aware of the risks that are out there, and more sensitive to the consequences associated with those risks," he says.
There is some positive survey data. While the AMR Research Q2 survey shows enterprises are concerned about low consumer spend, a survey from MFG.com, an online marketplace for the sourcing of parts and manufacturing services, asked participants to forecast company growth for 2009. Eighty-two percent expected to maintain or grow their business, with just 13 percent expecting an increase. Meanwhile, Panjiva's analysis of global trade data found that after four months of "free fall" in the number of manufacturers shipping to U.S. customers, there were increases from February to March of 2009 (up about 2 percent), and again from March to April (up about 8 percent).
But good news on economic confidence doesn't shake the overall awareness of risk, or the need to mitigate risk. "I absolutely think there is more risk these days," says Mitch Free, CEO of MFG.com. "On MFG.com, we are seeing people spread out their orders [to more suppliers] more so than in the past. They realize it might not be the most efficient way to source, but it's a risk-mitigating way to do it."
Besides dual sourcing as a mitigation tactic, Tohamy sees corporate buyers turning toward greater collaboration with suppliers, as well as performance-based contracting. Large buyers also have deployed visibility systems that spot exceptions that might pose risk, says Tohamy, but the more advanced companies are deploying supply network modeling and optimization applications to help them understand risks under different scenarios, and play "what-ifs?" with potential responses.
"Visibility solutions are more reactive versus looking at the future with modeling," says Tohamy. "There is a level of sophistication you get by being forward looking, and the use of modeling tools is one of the enablers of that."
