Supply Chain Risk Mitigation: A Three-Part Overview

Industry analysts agree that it’s important to make risk assessment an ongoing process, allowing for frequent plan updates as political conditions, fuel prices, tariffs, currency exchange rates, labor costs, and other supply chain security threats arise. But are logistics managers paying proper attention to their supplier’s solvency?

“Solvency is the degree to which current assets exceed liabilities,” explains says Rose Kelly-Falls, senior vice president, Supply Chain Risk Management at Rapid Ratings International, in Indianapolis, Indiana. “If shippers miss any ‘red flags’ in this area, they do so at their own peril,”

Kelly-Falls likes to tell a story about a small private machining company that was a second-tier supplier of clutch gears for a major U.S. auto manufacturer. It was located in a remote community, and was quietly purchased by a toy manufacturer without much fanfare.

“So when the auto maker needed a crucial piece of equipment for a new product launch, it was suddenly unavailable,” she recalls. “Why? Because this big multinational corporation did not ever bother keeping track of what it perceived to be a minor business partner.”

The result, she recalls, was a missed deadline and the loss of millions of dollars in revenue. Had the relationship not been underestimated, the risk could have been mitigated.

More than ever before, says Kelly-Falls, logistics managers need to understand their private suppliers, and carefully monitor their financial condition.

“This is crucial for a number of reasons,” she says “Typically, they lower tier suppliers 70-80% of a manufacturer’s company’s supply base. Many of their issues are not uncovered or realized until they are out of control.

Furthermore, she says, sub-tier private suppliers often don’t have the resources to develop and implement a risk management strategy of their own.

“Smaller private companies may have loose governance and have less access to capital to invest in programs or projects. In fact, many tend to lean on their customer to provide financial support.”

Addressing misconceptions

Many logistics managers often assume that private companies are always small and medium-sized with fewer than 500 employees. But this, too, is a dangerous misconception, says Kelly-Falls. For there are some very large private companies, representing “household names” in manufacturing.

“Take Bechtel,” for example,” she says. “A construction powerhouse, employing over 50,000 world wide. Or Cargill, a producer of food, beverage and tobacco products with more than 140,000 workers on their payroll. Pricewaterhouse Coopers, Mars, and Koch Industries are other corporate giants that remain private.”

According the U.S. Department of Commerce, private companies paid about 44% of the total U.S. non-public sector payroll and generated more than 50% of the nonfarm private GDP. They hired over 40% of high tech workers (scientists, engineers, computer programmers, and others), representing over 99% of all employer firms.

“In aggregate,” says Kelly-Falls, “we are talking about an economic powerhouse.”

Furthermore, say analysts, this “powerhouse” is a dynamic job creator. Firms with less than 20 employees have surpassed the employment peak reached in 2008, and 39% of the increase was accounted for by small business employing fewer than 50 workers.

But these small shippers are worried, says Bill Dunkelberg, chief economist with the National Federation of Independent Business, based in Nashville, Tennessee

“The Optimism Index barely budged in January,” he notes. “If small businesses were publicly traded companies, the stock market would be in shambles.”

While the business bankruptcy trend is down, say analysts with Trading Economics – an independent investment tracking firm in New York City – the long run annual average business bankruptcy rate over the period 1994-2012 is 42,700.

“Given the stagnation of the U.S. economy in the final quarter of 2012, we should be cautious about 2013,” says Kelly-Falls. “The small business survival rate for the first decade of this century was not promising. Almost 70% of new employer firms survive for at least 2 years. But only 44% last for 4 years and 31% last for 7 years. How many do you think last 15 years or more? A mere 25%!”

And for that reason alone, shippers should consider what impact that will have on their supply chains.

Coming up next: Risk Inventory

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