Global Supply Chains Not Ready for Challenging Times

Atlanta — December 8, 2008 — Nearly half of companies with global supply chains say they fear major disruptions in their ability to source, produce and ship goods around the world. And they're not doing much to prevent it.

In a new survey sponsored by UPS, 47 percent of companies say they need to pay more attention to risk mitigation compared to just 16 percent that believe they pay an adequate amount of attention. As a result, only 38 percent of those surveyed rate the resilience of their supply chain above average, while a troubling 42 percent say the expansion of their global supply chains has outpaced their ability to manage risk.

The global survey of nearly 350 senior executives was released recently by UPS and the Economist Intelligence Unit. The survey itself was supplemented with interviews of academic experts and leading supply chain practitioners.

Vulnerability Increasing

"Businesses appear to be increasingly vulnerable to supply chain disruptions that can have a catastrophic impact on business performance," said Dan Brutto, president of UPS International. "Success in the global economy depends in large part on building successful risk mitigation strategies that can turn a resilient supply chain into a competitive advantage."

Kim Andreasson, senior editor at the Economist Intelligence Unit and the editor of the report, points out that companies today already are more vulnerable as a result of having created tighter and leaner supply chains. "A lean organization is a requirement for competitiveness, but that can also expose a business to an increasing number of risks," he adds.

The survey pointed out some troubling findings, reinforcing the point that rising risks to supply chain resilience are too often ignored in the rush of day-to-day business — and companies know it.

For example, insufficient monitoring, risk assessment and contingency planning are leaving companies ill-prepared when crises hit. One of every 10 companies does not monitor suppliers for anything. About half of the remainder look only at immediate suppliers. Furthermore, in almost half the companies surveyed, formal risk assessment takes place only annually.

"Although some companies are taking sensible precautions to address risk, too many firms are leaving themselves open to unanticipated dangers," said Brutto. "And some of the steps companies are taking to improve resilience are not necessarily the best choices."

For example, a significant minority of businesses are falling back on increased inventory to address resilience problems, an expensive and ineffective approach. Almost half the companies surveyed expect to hold additional stock and raise inventory even more in the future.

Low-cost Sourcing Brings Risks

Low-cost country sourcing, which has grown significantly in recent years, brings its own set of challenges to global supply chains. Almost half of all survey respondents said low-cost sourcing had posed significant problems, such as the quality received from such suppliers and even their ability to deliver goods as promised. Although most companies intend to increase their low-cost sourcing, 10 percent of those surveyed intend to reduce it.

"We don't expect to see low-cost sourcing go away," said Brutto, "but it will look different in the future. The keys to successful sourcing from low-cost countries are like those of supply chain resilience in general: understand the issues, structure the supply chain appropriately, monitor performance and work with suppliers to improve operations." He also noted that multi-sourcing and near-sourcing to enhance resilience are likely to become part of best practices in the future.

Brutto offered four recommendations that companies should consider as they operate in an increasingly risk-filled environment:

Assess your supply chain — Companies need to map their existing supply chains to assess points of vulnerability, Brutto advised. "These could be a key supplier critical to your organization, a bottleneck from using a single port of entry for all your products into a continent or a single transportation mode that could make your supply chain susceptible to a strike or some natural disaster. Once these points of failure are identified, you can develop contingency plans to mitigate risks."

Develop alternative plans — Critical supplier risk can be mitigated by developing alternate sources of supply, Brutto said. "A bottleneck can be alleviated through setting up alternate entry points to less-crowded ports. Adopting a multi-modal strategy will give you flexibility to move your product if your primary mode were to fail."

Ensure visibility across your supply chain — Supply chain visibility is the key to a resilient supply chain, Brutto noted. "Because supply chains today span multiple continents and multiple partners, you need visibility into the progress of your purchase order through your supplier's manufacturing process, during the transportation of the product through your freight forwarder and delivery to your facility. In addition, you need order cycle visibility through the distribution process. Having real-time visibility across your supply chain will enable you to identify a problem as soon as it occurs and put your contingency plans in action."

Develop key partnerships with your logistics providers — "Developing trusted partnerships with your logistics providers can increase the resilience of your supply chain," said Brutto. He asserted that integrated logistics partners have the ability to provide supplier management services, enable excellent visibility to products within the supply chain and implement a multi-modal strategy. "They also enable smooth trans-border movements of goods and can quickly implement an alternate operating plan to get around bottlenecks," he said.

While the challenges are daunting, there is an upside: an opportunity for competitive advantage. "By pursuing risk mitigation and resiliency strategies, supply chain executives can help their organizations grow and retain customers, increase revenues and profits and improve shareholder value," Brutto concluded.

The entire report and more survey results are available at longitudes08.com.

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