Executive Briefings

Supply Chain Risk, 2008-2009: As Bad as It Gets

AMR Research has been analyzing trends and practices in supply chain risk management for almost five years now. But back in 2004, we never could have imagined we'd live through a year like 2008-2009. Our newest quarterly risk survey data just came in, and the story shows a quantum leap in maturity among global supply chain professionals who have enjoyed the ultimate real-world crash course in risk assessment and mitigation. The bottom line: Disaster is real and pervasive, but deeper collaboration plus smarter modeling make a big difference.

Perceptions of the risks that matter most for those managing a global supply chain have shifted in the past 12 months, but much of what we see is a return to traditional worries. One year ago, the emerging concerns centered heavily on transportation costs, especially oil, and surging commodity prices. The talk at the time was of containers being scrapped for the steel in China, while available capacity on eastbound ocean lanes was as hard to come by as Super Bowl tickets. Supplier failure, traditionally among the very top supply chain risks, was ranked low by a community struggling more with excess demand than shaky suppliers.

Fast-forward one year and the Beijing Olympics are in the history books. Oil has crashed from $140 per barrel to less than half that price. Global credit completely collapsed, which sent unemployment up to double digits in many big economies, and tensions born of desperation threatened peace around the world. For drama, add Somali pirates, swine flu, and salmonella-laden peanuts, and you have a full-fledged circus of fear. Battle-tested is one way to describe the state of supply chain risk management today.

This quarter's data shows supply failure again at the top of the list, way up from last year. Commodity price volatility remains a top concern, although it's down slightly from a year ago, indicating that supply chain people don't necessarily like low commodity prices any more than high prices--they just want stability. Product quality failures, both internal and from suppliers, are well up over the year in a trend that looks to be independent of economic conditions. Perhaps this reflects the challenge of ever-longer and more complex supply networks.

Risks that have seen a decline in importance are the ones that first come to mind for the layman. Natural disaster is at the very bottom of the 15 risks we studied, and it's in decline. For anyone watching the news, this might seem counterintuitive, but in practice, supply chain resilience is actually one of the reasons recent disasters have meant less business disruption than one might imagine. Case in point was the Chengdu earthquake, which killed some 80,000 people, but it did little to slow the flow of goods from China to world markets. Another was Hurricane Katrina, which was an epic failure for FEMA, but a showcase of logistics excellence for supply chain people from Procter & Gamble, Home Depot, and others.

Immature physical infrastructure is another risk down for the year. This problem is steadily receding, however, as developing markets upgrade their roads, ports, and communication networks.

China is the world capital of supply chain risk. To be fair, China's role as the manufacturing and sourcing location of choice for so many companies means it contributes a lot of risk simply by being important. Perhaps we may have too many eggs in one basket? The data says that companies are leaving China for onshore or nearshore sources, but it remains dominant as a supply center. As such, the fact that China owns top risk billing in 12 of 15 risk categories may be understandable. However, proportionally to the United States, Chinese supply and manufacturing sources are dramatically worse across the board.

Particularly serious are risks associated with companies' brands or other intellectual property. China stands completely alone as a source of risk for IP infringement. It also leads prominently on both internal and supplier quality failures as well as security breaches. The message to companies with significant shareholder value resting on patents, designs, brand image, or other pure IP is that China may not be worth the risk.

When asked how they mitigate IP risk, respondents answered overwhelmingly that the best move is to insource sensitive components and processes. The move away from China sourcing starts with higher value-added work, boding ill for the Dragon's ambitions to outdo Japan's ascent from a cheap labor to high-tech economy.

Supply chain professionals are sophomores no more. Sophomore means "wise fool," and it probably was a fair label for most supply chain professionals a year ago. They were wise enough to know risk was important, but too foolish to know what to do. The 2008-2009 crash course has changed all that.

One year ago, the most successful risk mitigation strategy in use was IT investment for better supply chain visibility. Today, the top answer is closer collaboration with trading partners. The drop in percentage of respondents citing IT-enabled visibility was prominent: 14% called it their most successful strategy in 2008, but only 9% do now. Contrast this with the 10% that favored trading partner collaboration in 2008. This number jumped all the way to 18% of respondents that said this was their most successful strategy in 2009. A year ago, the idea was just to know there was a problem. Now it's about understanding how to handle it.

Another data point that suggests a jump in sophistication in supply chain risk management is the surge in the success with modeling tools. Last year, while a significant portion of respondents (31%) were using these complex tools, only 4% claimed this was the most successful strategy employed. Our most recent data shows a small climb in the number of companies using such tools, but a doubling (8%) in the number of those that felt this was their best risk mitigation approach.

Again, the sophomore appears to have graduated from risk management based on simple alerts to something far more nuance and predictive. The community has accordingly upped its commitment to systematically address this matter with the formation and growth of a Supply Chain Risk Leadership Council led by companies like Cisco Systems, Boeing, Jabil, and FedEx.

Globalization has brought benefits to the world economy by expanding the choices companies have in building their supply networks. It has also brought new degrees of risk to business at many levels. Managing much of this new risk is inevitably the job of supply chain professionals. 2008-2009 has been a stretch where this reality has hit home, forcing a forward-looking discipline to get real almost overnight.
AMR Research

AMR Research has been analyzing trends and practices in supply chain risk management for almost five years now. But back in 2004, we never could have imagined we'd live through a year like 2008-2009. Our newest quarterly risk survey data just came in, and the story shows a quantum leap in maturity among global supply chain professionals who have enjoyed the ultimate real-world crash course in risk assessment and mitigation. The bottom line: Disaster is real and pervasive, but deeper collaboration plus smarter modeling make a big difference.

Perceptions of the risks that matter most for those managing a global supply chain have shifted in the past 12 months, but much of what we see is a return to traditional worries. One year ago, the emerging concerns centered heavily on transportation costs, especially oil, and surging commodity prices. The talk at the time was of containers being scrapped for the steel in China, while available capacity on eastbound ocean lanes was as hard to come by as Super Bowl tickets. Supplier failure, traditionally among the very top supply chain risks, was ranked low by a community struggling more with excess demand than shaky suppliers.

Fast-forward one year and the Beijing Olympics are in the history books. Oil has crashed from $140 per barrel to less than half that price. Global credit completely collapsed, which sent unemployment up to double digits in many big economies, and tensions born of desperation threatened peace around the world. For drama, add Somali pirates, swine flu, and salmonella-laden peanuts, and you have a full-fledged circus of fear. Battle-tested is one way to describe the state of supply chain risk management today.

This quarter's data shows supply failure again at the top of the list, way up from last year. Commodity price volatility remains a top concern, although it's down slightly from a year ago, indicating that supply chain people don't necessarily like low commodity prices any more than high prices--they just want stability. Product quality failures, both internal and from suppliers, are well up over the year in a trend that looks to be independent of economic conditions. Perhaps this reflects the challenge of ever-longer and more complex supply networks.

Risks that have seen a decline in importance are the ones that first come to mind for the layman. Natural disaster is at the very bottom of the 15 risks we studied, and it's in decline. For anyone watching the news, this might seem counterintuitive, but in practice, supply chain resilience is actually one of the reasons recent disasters have meant less business disruption than one might imagine. Case in point was the Chengdu earthquake, which killed some 80,000 people, but it did little to slow the flow of goods from China to world markets. Another was Hurricane Katrina, which was an epic failure for FEMA, but a showcase of logistics excellence for supply chain people from Procter & Gamble, Home Depot, and others.

Immature physical infrastructure is another risk down for the year. This problem is steadily receding, however, as developing markets upgrade their roads, ports, and communication networks.

China is the world capital of supply chain risk. To be fair, China's role as the manufacturing and sourcing location of choice for so many companies means it contributes a lot of risk simply by being important. Perhaps we may have too many eggs in one basket? The data says that companies are leaving China for onshore or nearshore sources, but it remains dominant as a supply center. As such, the fact that China owns top risk billing in 12 of 15 risk categories may be understandable. However, proportionally to the United States, Chinese supply and manufacturing sources are dramatically worse across the board.

Particularly serious are risks associated with companies' brands or other intellectual property. China stands completely alone as a source of risk for IP infringement. It also leads prominently on both internal and supplier quality failures as well as security breaches. The message to companies with significant shareholder value resting on patents, designs, brand image, or other pure IP is that China may not be worth the risk.

When asked how they mitigate IP risk, respondents answered overwhelmingly that the best move is to insource sensitive components and processes. The move away from China sourcing starts with higher value-added work, boding ill for the Dragon's ambitions to outdo Japan's ascent from a cheap labor to high-tech economy.

Supply chain professionals are sophomores no more. Sophomore means "wise fool," and it probably was a fair label for most supply chain professionals a year ago. They were wise enough to know risk was important, but too foolish to know what to do. The 2008-2009 crash course has changed all that.

One year ago, the most successful risk mitigation strategy in use was IT investment for better supply chain visibility. Today, the top answer is closer collaboration with trading partners. The drop in percentage of respondents citing IT-enabled visibility was prominent: 14% called it their most successful strategy in 2008, but only 9% do now. Contrast this with the 10% that favored trading partner collaboration in 2008. This number jumped all the way to 18% of respondents that said this was their most successful strategy in 2009. A year ago, the idea was just to know there was a problem. Now it's about understanding how to handle it.

Another data point that suggests a jump in sophistication in supply chain risk management is the surge in the success with modeling tools. Last year, while a significant portion of respondents (31%) were using these complex tools, only 4% claimed this was the most successful strategy employed. Our most recent data shows a small climb in the number of companies using such tools, but a doubling (8%) in the number of those that felt this was their best risk mitigation approach.

Again, the sophomore appears to have graduated from risk management based on simple alerts to something far more nuance and predictive. The community has accordingly upped its commitment to systematically address this matter with the formation and growth of a Supply Chain Risk Leadership Council led by companies like Cisco Systems, Boeing, Jabil, and FedEx.

Globalization has brought benefits to the world economy by expanding the choices companies have in building their supply networks. It has also brought new degrees of risk to business at many levels. Managing much of this new risk is inevitably the job of supply chain professionals. 2008-2009 has been a stretch where this reality has hit home, forcing a forward-looking discipline to get real almost overnight.
AMR Research