RISK & COMPLIANCE

SUPPLY RISK:

What You Dont Know

Buyers and suppliers can help each other weather the rough economic storm. BY SUNDAR KAMAKSHISUNDARAM

Can Hurt You

A
s the global economy continues to work its way out of the 2008-2009 recession, companies still find themselves struggling to assess, prepare for, and manage disruptions in their supply chains. Supply risk remains a constant concern, and commodity price swings, credit shortages, consolidations, and bankruptcies are still a threat to companies regardless of their size or the industries in which they operate. Now, more than ever, it is important for buyers and suppliers to work together more closely, share the economic burden of the times, and embrace innovative ways to ensure their mutual health. During difficult economic times, buyers are presented with the highest risk of disruptions in the supply chain, and, in turn, cash-strapped customers are much less likely to tolerate these disruptions. If a supplier cant access capital, it will fail. And when suppliers fail, the companies that rely on them face a higher likelihood of failing as well. How can buyers and suppliers bind together to better weather the storm? As the gap between low-quality and high-quality borrowers grows, more suppliers will experience cash flow problems. For forward-looking buyers willing to come to the rescue of their most important suppliers, third-party supply chain financing options exist today that enable buyers to hold onto their cash while suppliers are paid early at far more competitive rates than traditional factoring or card providers allow. Buyers can use their good credit ratings to help suppliers borrow at lower rates than they could achieve on their own. The result is a healthier and more productive
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relationship and supply chain. In addition, buyers who have the capital to pay suppliers early can also offer suppliers accelerated cash flow through dynamic discounting, which gives suppliers quick access to capital by offering buyers discounts in exchange for early payment. By joining together to optimize working capital and lower overall costs, buyers and suppliers can dramatically reduce risk and create the strong relationships that will not only protect themselves in the short term but also give both sides greater flexibility in pursuing opportunities in the long term. Entire supply chains can stretch their capital, accomplish more with less, and not merely survive the tough times, but create an entirely new competitive playing field. As outsourcing, consolidation, and globalization continue, supply risk will grow as a significant source of overall business risk. Companies can take the following steps to minimize these risks and the potential negative impacts on their businesses while positioning themselves to compete more strongly when economic conditions improve. Include risk management in your sourcing strategy. Revisit your sourcing process, requests for proposal (RFPs), etc., to confirm that risk management is adequately addressed in your evaluation by all of your buyers. Audit the financial, operational, and balance-oftrade exposure of your most strategic and mission-critical suppliers. Too often investigation of supplier solvency and dependencies are limited to the initial sourcing project. You need only to open

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a newspaper or turn on the nightly news to realize that the health of even the seemingly most stable companies can degrade quickly. Look for early warning signs. Drops in quality or shipment delays can be indications that the supplier has cut too deep into its operations. More frequent requests for early payment or changes in sales and support personnel should also raise a red flag. While these symptoms may not necessarily belay supplier troubles, they should warrant further investigation. Increase the frequency of supplier performance reviews. In the face of highly volatile markets where credit is tight, reviews should be done at least quarterly with your most strategic and mission-critical suppliers and semi-annually with your next tier of suppliers. Automate your supplier management process. The above actions may be time consuming, but theyre well worth the effort considering their risk avoidance potential. Leading spend management organizations are simplifying this process by leveraging supplier management tools that combine selfservice portals for suppliers to publish and manage their own profile information (and workflow for routing supplier profiles for review and approval); scorecarding and performance measurement utilities; and project management capabilities for cor-

rective action management. Use of such tools can improve visibility, control risk, and enable you to extend supplier management to a broader portion of your supply base. Another way to assess supply risk and prepare for potential disruptions is to utilize modern-day social tools that have been woven into enterprise applications. These include community-based references and ratings to judge seller capabilities and performance. Financial risk scores from rating firms such as Dun & Bradstreet, coupled with online profiles of globally enabled selling organizations, give a deeper picture of a companys financial viability. LinkedIn groups and embedded social tools offer the opportunity to network with buyers, sellers, partners, and third-party sources to keep track of developments in the business sector and potential risks to the supply chain. In todays economy, the only thing that is certain is that companies will face more supply risks and challenges than ever before. With the right tools, they can assess their risks and manage them effectively. WT
Sundar Kamakshisundaram is a senior solutions marketing manager for Ariba, a global provider of solutions for spend management and supply risk management.

For reprints of this article, please contact Cindy Williams at williamsc@bnpmedia.com or 610-436-4220 ext. 8516.

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