Supply chain executives fail to properly manage supplier risks

Although supply chain executives are well aware of the risks facing their supply chains, many are not developing and executing strategies to properly manage those risks. For instance, a surprising 90 percent of the 153 supply chain executives who participated in a recent study on supply chain risk said that their companies do not quantify the risks associated with outsourcing production. The study was conducted by The Global Supply Chain Institute at the University of Tennessee and was sponsored by UPS Capital Corp.

The research, which is summarized in the report Managing Risk in the Global Supply Chain, delved into sourcing practices in extended global supply chains. Respondents said that 45 percent of their supplier spending occurs outside the United States. Surprisingly, more than one-third (38 percent) of respondents' suppliers are the sole sources for some parts or products. That's less likely to happen in the case of transportation services, where only 14 percent relied on one provider.

Should disaster strike, most of the survey takers will be ready to respond: 69 percent said they had a documented plan in place to salvage business with their customers through product substitution, proactive communication, or inventory. That still leaves nearly one-third with no disaster-response plan in place. In addition, only 53 percent said they had a backup plan that could be quickly implemented if a natural disaster or equipment failure shut down a facility.

The executives ranked potential quality problems as the greatest risk facing their supply chains. They rated quality at 5.8 on a scale of 10, with 10 indicating the greatest concern. Survey takers ranked the need for increased inventory second and natural disasters third.

Selecting financially strong, world-class suppliers was ranked as the most effective strategy for mitigating supply chain risk. The second-ranked strategy was compressing global shipping time and cycle-time variation. The third most cited strategy was using visibility tools to closely track global shipments and take action when necessary.

At the bottom of the list was the purchase of insurance. "We were surprised to learn that insurance is simply not on the radar screen of supply chain professionals as a risk mitigation approach," said study author J. Paul Dittmann, PhD., executive director of The Global Supply Chain Institute.