Reducing Supply Chain Risk – A Data Driven Approach
Josh Green, CEO, Panjiva -- Supply Chain Management Review, 2/6/2009
Doing business with suppliers across the globe is an inherently risky activity. Supply chain managers have always understood this. But with limited risk management tools at their disposal, they've had two choices: live in fear, or focus on something more productive—like negotiating lower prices.
Today, however, we're facing massive economic uncertainty and, with it, massive risk of supply chain disruption. Indeed, The New York Times recently reported on factory owners that are closing up shop without any warning to their employees or their customers. And Chinese authorities reported that 67,000 factories went out of business in the first half of 2008—before things really got bad in the global economy. Bad news for supply chain managers, to be sure.
However, there's good news for supply chain managers who are willing to confront risk head-on. While risk can never be eliminated, it can be significantly reduced through the intelligent application of information. Today more information than ever before is available to supply chain managers.
There are of course many types of information about your suppliers. For these purposes, let's focus on three classes of information—financial data, operational data, and on-the-ground intelligence—and how to make the most of them.
Financial data about your suppliers can sometimes be obtained from information providers such as D&B, or international equivalents. When this information is available, it can be quite useful in flagging risk. For instance, you may be able to see that one of your suppliers isn't paying its bills on time—a sign that the company is in financial trouble.
Operational data about your suppliers can also help you flag risk. For instance, by looking at shipment data, you can figure out which of your supplier's customers are buying more and which are buying less. If you see that all of the supplier's customers are ordering significantly less, you should be concerned that your supplier may not be around for much longer. (Full disclosure: my firm, Panjiva, specializes in this type of analysis.)
And, of course, if you have people on the ground in the supplier's facilities, they can help you flag risk. Your people will likely notice if the supplier is rapidly cutting headcount, or if activity has dropped precipitously—both signs that your supplier is in trouble. Also, depending on your relationship with the supplier, your people may be able to get access to the supplier's books, providing another perspective on their finances.
Each of these data sources has its strengths and weaknesses. Financial data is often not available—or terribly reliable—for overseas suppliers. Operational data is best for understanding a supplier's cross-border transactions, but will not provide you with a sense of a supplier's home country business. On-the-ground intelligence is expensive (or impossible) to collect if you don't already have people in your supplier's facilities. Thus, no single source of information is a silver bullet when it comes to risk management. Cutting-edge companies are finding creative ways to combine data from multiple sources to effectively manage risk.
So how can you use data to effectively manage risk? The first step is understanding where you're vulnerable. It sounds obvious, but surprisingly few companies have clearly identified which suppliers are most critical to their operations. Doing so is a necessary first step to effectively managing risk.
Next, put in place a process for regularly gathering data about all of your key suppliers—say, on a monthly basis. As noted above, data can come from a variety of sources. Evaluate which of these sources are available to you, and take a look at what the available data tells you about your key suppliers right now. This process will help you understand what risks you're currently facing. Just as importantly, you'll gain an intuitive sense for what constitutes a warning flag going forward. For instance, you may decide that, for key suppliers, seeing a 25 percent decline in shipment volume is cause for significant concern.
Now that you've identified a process for regularly gathering data, and you've clearly defined what warning flags look like, you need a clear set of plans describing what you'll do when warning flags appear. Depending on the nature of the warning flag, you may choose to collect more data, hop on a plane and go visit the supplier, or begin onboarding a new supplier. Regardless, having a plan of action before warning flags appear makes them a lot less frightening.
Certainly, it's a risky time to be a supply chain manager. But perhaps that's always been true. What's new is that there are now better tools than ever before for confronting—and, ultimately, reducing risk. The best tool of all—Information.
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www.panjiva.com
SCMR Fan - 2009-6-2 14:48:00 EST -
Panjiva has a bunch of coverage lately. They just announced an analysis highlighting that global suppliers are reeling from the economic downturn. Between the months of November and December of 2008, there was a 5% decline in suppliers shipping to the US. Check them out: www.prac.com
SCMR Fan - 2009-6-2 14:40:00 EST
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