New research shows that global companies are increasingly moving to support suppliers and safeguard their supply chains.
Supporting suppliers has become a critical supply chain issue for many global companies, according to a new study by consultants PRTM.
Global Supply Chain Trends 2008-2010: Extended Edition found that 75 per cent of participants say they have recently helped at-risk suppliers to ensure deliveries; 67 per cent are using new risk analysis tools to spot threatened suppliers early; 45 per cent say they have provided financial support to suppliers in the form of revised payment terms or risk financing.
“The global economic crisis has put global supply chain networks to the test. Faced with increasingly unpredictable demand and tighter requirements from lenders, companies are forced to look at all activities through the lens of liquidity. For many, this means reducing inventory, and increasing collaboration with, and even financially supporting, their key suppliers,” says Gordon Colborn, director of PRTM’s Global Supply Chain Innovation practice.
Colborn admits to being a little surprised at the extent to which companies say they are supporting suppliers to maintaining liquidity. “Many said they were helping ‘at risk’ suppliers by providing financial support either through revised terms or risk financing,” he says.
Risk in the supply chain is often talked about, but Colborn points out that in the past it has not been as critical as it is now and companies are having to re-examine long-held perspectives.
The trend over the past few years has been towards lean supply chains often with single sourcing and JIT delivery systems at the same time as rapid globalisation. Companies are now having to reassess these systems and consider the possibility that they might have gone too far.
“Risk assessment and mitigation are now top of the agenda,” he says. “Global companies can’t afford to have key suppliers go under. This is a major risk to supply chains.”
Companies are responding to this in the short term by working to understand risks in the supplier base better so that problems can be identified more effectively and dealt with before they lead to a crisis.
Colborn also points out that the problems don’t go away when the economy starts to improve. In fact, he warns, the level of risk could increase because suppliers weakened by the recession will need more working capital to meet the growth in demand and they could simply run out of cash.
In the longer term, Colborn believes risk will become a new area of focus, another measure of supply chain effectiveness alongside such things as on-time delivery or working capital.
And he argues that it will require a cross-functional view of the world to achieve this. “No-one has all the information so, when trying to understand that risk, there are no simple answers.”
The new survey results and analysis reflect the views of more than 75 global manufacturing and service companies. PRTM surveyed the respondents between April and May 2009, and contrasted the responses with those of more than 300 global executives who participated in PRTM’s Global Supply Chain Trends 2008-2010 original study, released in May 2008.
The survey also found that improving cash flow and working capital has emerged as urgent. Even those that are considered “healthy” assume they may face challenges when seeking funding from financial institutions, due to stricter requirements. Inventory reduction is the main focus for increasing cash flow, according to 74 per cent of those surveyed.
The crisis is also forcing changes to some companies’ global footprints. Some supply chain executives are questioning recent outsourcing decisions and “in-sourcing” selected activities. This trend is most widely reported by companies in the automotive sector, where 27 per cent of companies surveyed plan to in-source activities to tighten control over supply chain performance. Others are sharply increasing focus on supply chain flexibility – the ability to maintain cost-effective delivery capabilities in times of unscheduled and large demand fluctuations. This is still considered the most critical success factor for supply chains worldwide.
“The recession has sharply degraded the reliability of demand and supply forecasts beyond a three-month window. This explains why more than half the participants say that supply chain flexibility is even more critical than just six months ago,” says Colborn. Many are redesigning their Sales & Operations Planning (S&OP) processes and embarking on initiatives to reduce product complexity as a result.