For Most Companies, Dealing with Suppliers Is Risky Business

Lack of supplier management strategy threatens to disrupt manufacturing at major American corporations, reports Aberdeen Group

Irving, TX — October 18, 2005 — Most companies lack a strategic approach to managing their suppliers, even though supply risks are on the rise, according to a study released today. This dangerous trend could lead to disruption of critical supplies, leaving companies unable to manufacture products on time and perform other revenue-producing activities.

More than 80 percent of supply management executives at 180 global enterprises reported that their companies experienced supply disruptions within the past 24 months, according to the study. The study, Supply Risk Management Benchmark: Maintaining Continuity and Mitigating Risks in an Uncertain Global Economy, was conducted by Aberdeen Group and sponsored by Austin-Tetra, a provider of outsourced supplier and customer data management services.

Study participants said supply glitches negatively impacted their companies' customer relations, earnings, time-to-market cycles, sales and overall brand perception.

Worse yet, more than three-quarters of companies expect supply risks to increase over the next three years, thanks to supply market instability, new regulatory requirements, natural disasters and terrorist attacks. In addition to these market challenges, enterprises have become more vulnerable to supply disruptions because of the adoption of best practices, such as low-cost country sourcing, outsourcing, supply base rationalization, and lean and just-in-time initiatives.

Years of cost-cutting and lean operating practices have made businesses more vulnerable to supply disruptions than ever before, said Tim Minahan, author of the study and senior vice president of supply research and strategy at Aberdeen. Pressures for business continuity and regulatory compliance will force companies to make supply risk management a core business discipline within the next five years by adopting procedures, metrics and systems.

Less than half of enterprises follow established procedures for assessing and managing supply risks, according to the study. In addition, many procurement organizations lack sufficient market intelligence, skills, and information systems to effectively predict and mitigate supply risks.

Enterprises leveraging supplier information services and solutions as part of a comprehensive supply risk assessment and management program have not only reduced the frequency and impact of supply risks, but also have outperformed their peers in supply performance and costs, Minahan added.

Aberdeen predicts that supply risk management will emerge as a major business discipline and measure of competitiveness within the next five years. In fact, 60 percent of companies lacking a formal supply risk management program plan to initiate one within the next year.

Aberdeen's benchmarking study uncovered five approaches that companies used to achieve the best performance from their supply risk management programs. Enterprises employing these methods outperformed their peers not only in overall reduction of supply chain disruptions, but also in overall delivery, cycle time and quality performance:

  • Define and enforce standard performance and risk measures and assessments.

  • Make risk management a core and repeatable business discipline.

  • Adopt sourcing methods to balance cost, performance and risks.

  • Leverage technologies and information services to improve risk planning, monitoring and response.

  • Develop and collaborate with suppliers to detect and mitigate risks.

Supply chain executives are discovering new ways to apply technology and innovative processes to the challenge of managing uncertainty. Read more in Rethinking Risk, cover story in the August/September 2005 issue of Supply & Demand Chain Executive. Also check out the In Depth article from A.T. Kearney, Managing Risk in the Supply Chain.

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