Supply Chain Reality: Much Risk Tied Up in Shrinking Pool of Suppliers

Today's companies have better supply chain apps than ever before -- but they also face bigger risks. Many large enterprises use the same, small pool of supplier companies, so the ripples from one recession-related sinkage can spread far and wide.

Without question, today's supply chain applications can provide unmatched visibility into a company's supplier base, help spot inefficiencies and allow for better, smarter decision-making on logistics and inventory.

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But if several manufacturers in your Chinese or European network suddenly shut down, there's not much software can do at that point. You're on your own.

That is, in fact, a problem that's been staring at companies big and small since the recession began in earnest last fall, and has been amplified each month as new manufacturing data surfaces showing even more risk and uncertainty.

For the Fortune 500 set, for instance, data from CVM Solutions (a supplier-management software vendor) shows that the world's biggest companies rely on a relatively small pool of the same suppliers. And when businesses in this pool sink, it can ultimately mean "interruptions in business operations, financial loss and damage to brand reputation," notes a recent report from CVM.

"Years of strategic sourcing and supplier consolidation has created a dangerously small group of suppliers that receive most of the Fortune 500 companies spend," states the report. "If these common suppliers become 'high risk' suppliers, then that risk will likely impact a high percentage of Fortune 500 companies."

This scenario is likely to become more visible in the auto industry with General Motors' recent bankruptcy filing, as the harsh ripple effects fan out into the global auto parts supply chain.

"As Bad As It Gets"

Making sense of multiple streams of industry data, however, can be challenging, to say the least. A recent New York Times article expressed both optimism and pessimism about the decrepit state of global manufacturing, though the overall message was clear: "Taken together," notes the article, which compares manufacturing data from China, India and other regions, "the data appear to indicate that a global recovery remains some way off and is likely to be feeble."

New global trade data from Panjiva, a vendor that tracks the health of the world's suppliers, shows that "after four months of free fall in the number of manufacturers shipping to American customers," there have been small increases from February 2009 to March, and then from March to April, notes Panjiva CEO Josh Green on his blog. However, he adds, "the news isn't all good."

Data released by Chinese officials, for example, suggests that, on a seasonally adjusted basis, "April was worse than March for the world's largest exporting economy," Green writes. "Risk for those engaged in global trade remains high: The percentage of significant manufacturers on the Panjiva Watch List edged up from 30 percent in March to 31 percent in April."

China, in particular, has lost much of its luster as the low-cost, no-frills manufacturer to the world. China "is the world capital of supply chain risk," notes Kevin O'Marah, AMR Research's chief strategist in a May report, titled "Supply Chain Risk, 2008-2009: As Bad as It Gets." Top risks include: intellectual property infringement, supplier quality failures and internal product quality failures.

That inherent Chinese risk becomes almost exponential, simply because so many companies have flocked to China for sourcing partners: And when the dominos fall, it's difficult to make them stop. O'Marah offhandedly wonders whether the world has put "too many eggs" in China's basket.

Of course, when the economy does rebound, companies may find that there aren't enough manufacturers to deal with their manufacturing demands.

O'Marah sums up today's unenviable supply chain environment this way: "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," O'Marah writes. "The bottom line: Disaster is real and pervasive."

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