While the economists have declared the "worst recession" since the Great Depression over for months, there's a lot of uncertainty as to when the recovery will finally arrive.  It's not an easy time to be a manufacturer or a retailer - buffeted by good news about consumer confidence one day, and bad news about unemployment figures or credit tightening the next. At best, it's a game of trying to figure out if, when and how much to ramp production and inventory.

Navigating the ups and downs can give even the most expert supply chain executive heartburn, especially when it comes to what do about suppliers.  Nearly 60,000 businesses filed for bankruptcy in 2010; but it's just as easy for businesses to cease operations and disappear without leaving debt or filing for bankruptcy.  More and more, avoiding the impact of these "hidden failures" keeps supply chain executives up at night asking, "Which suppliers are stable enough to ride out this storm and have the flexibility to ramp when I need it?" That's a tougher question to answer, and one that requires a more holistic approach to understanding the strength of the supply base, and a process that encapsulates several steps in the procurement cycle into an exercise that fundamentally allows a company to test the mettle of its supply base - supplier by supplier.

Step 1:  Identify critical suppliers.

Which ones are strategic to the business? Which are sole-sourced? Which provide critical commodities?  These relationships are the ones that absolutely must be on the watch list for any signs of struggle.

• Prioritize the most critical suppliers to begin evaluating the resiliency of the supply chain and crafting a strategy for shoring up the vulnerabilities that might get in the way of meeting demand.

Step 2: Evaluate financial health.

Think a boost in credit score is a sign of a solid financial foundation? Think again. Companies often accelerate payments to improve credit scores in the short terms - in advance of seeking loans or lines of credit or ahead of merger and acquisition activity.  A bump in credit rating could be a sign that change is on the horizon - change that might not be in the customer's favor.

There's a lot to be said for understanding a supplier's financial state.  Of course, this is easier said than done when dealing with privately held companies.

• If a privately held supplier is one that the company absolutely, positively cannot do without, meet with the supplier's leadership team, including the CEO and CFO to get the answers needed.  Approach these conversations in an open-handed manner, discuss future plans and the reason for the evaluation, to engender a full exploration of the issues at hand - and alternatives for resolving them.

Step 3: Watch for changes in operational performance.

Unfortunately, many companies are lulled into a false sense of security when they've got a handle on financial information about a supplier.

• In fact, supplier performance may be one of the most telling signs of pending instability. Delivery and quality performance that suffer can indicate that supplier is cutting corners, cutting costs or reducing capacity. The combination of operational and financial performance degradation is surely a sign that a supplier won't be there when needed.

Step 4: Don't underestimate the impact of things beyond control.

If there's one lesson we've learned during the past few years, it has to be that there are factors beyond a customer-supplier relationship that can have serious consequences for the supply chain. Political uncertainty (especially in emerging economies), natural disasters and socioeconomic instability have made national headlines in the past 12 months - all ultimately affecting the production and delivery of goods and services.

• Asking critical suppliers what disaster recovery plans are in place and how quickly they can execute those plans and return to business provides a strong read on how robust management of the business is - and how likely the supplier is to recover.

Step 5: Plan for the Worst-Case Scenario

Engaging with suppliers on the fundamentals can go a long way to ensuring that the when the good times come back around, the supply chain can run on all cylinders.  That said, the best peace of mind comes from putting in place a "just-in-case" plan. These actions can be thought of hedging against the worst case scenario.

• Find alternative suppliers to critical resources and go through the vetting and certification process so you've got a replacement ready if disaster strikes.

• Put your own disaster recovery plan in place.

• Place inventory buffers at risk points.

In truth, these actions reflect smart strategy regardless of the overall state of business. Supply chains today are leaned to the point of brittleness, meaning that any disruption can cause a failure to deliver. Now, though, with pent-up demand poised to be unleashed at any time, the imperative to check once, check twice and check again on the supply base's stability is impossible to ignore.

Source:  D&B Supply Management Solutions