Is the global economic crisis creating cracks in your supply chain? The worldwide credit crunch, slowing economies and changing consumer preferences triggered in 2008 will continue to reverberate in 2009. Benchmark research by Marsh Inc. finds that leading companies are changing their supply-chain risk practices for 2009 to better protect themselves and their customers.
Total landed-cost analysis and product quality checks are no longer sufficient. Leaders are ratcheting up their scrutiny of their suppliers’ financial conditions. This includes not just looking at suppliers’ credit ratings and financial histories but also asking suppliers such questions as:
— How has your line of credit with your bank changed from the beginning of 2008?
— Are you getting cash advances on our orders, such as by factoring letters of credit?
— Do you have sufficient cash flow to fund fully the raw material purchases for our orders?
Don’t assume that long-time suppliers are still stable. Recent supplier meetings held by large retailers, for instance, have shown unexpected vulnerabilities.
Risk-aware companies are re-evaluating their supplier payment and INCOTERMS, as well as re-examining sole sourcing and increasing the diversity of countries from which they source. These actions will help shield a company from socioeconomic instability, local financial institution failures and government economic actions. For instance, consider slowing payables extension initiatives for your more vulnerable suppliers. New supply-chain insurance products from insurers such as AIG and Zurich are also options for companies worried about economic fragility or other vulnerabilities in their supply base.
Finally, continuous monitoring of supplier performance is crucial to spotting financial red flags. Greater lead-time volatility, more short shipments and increased quality hiccups can signal financial difficulties and should trigger a thorough re-examination of the supplier. Also monitor whether your supplier has cut back on its quality assurance staff or switched its suppliers in an attempt to cut costs.