It may seem that once all the lists of potential suppliers are in hand, simply looking at price and quality will satisfy the need for supply chain data. Experience shows this isn't enough.

"Simple disruptions in the supply chain can have ripple effects that last for years and cost millions of dollars so it is essential to know as much as possible about supplier performance," noted a recent brief of an Aberdeen Group report entitled Supply Risk Increases While the Market Stands Still.

Anticipating and managing risk is inherently tied to forecasting and supplier intelligence.

Demand Risk
AMR Research recently asked 100 companies what their greatest supply chain risk was, and while conventional wisdom suggests supply disruption as the highest risk factor, 64 percent of the companies surveyed indicated that demand volatility was the greatest challenge to their supply chain.

As such, AMR identified the following seven areas of focus to reduce demand risk:

• Educate your organization on demand and the impact of demand-side risk. It's important for members of each functional group to know their ability to improve demand visibility.

• Design — don't just accept — the demand signal. Step back and determine how many demand streams exist and how to align the demand streams with the best source of data.

• Open up the channel and build demand networks. Use software as a service to build private networks to reduce design latency and develop a pull-based signal.

• Focus on balancing risk with opportunity in sales and operations planning. Move from internal consensus processes to outside-in processes based on channel collaboration.

• Decrease demand latency. Focus on the reduction of demand latency as a measurement in improving supply chain excellence.

• Use downstream data as an indicator in forecasting processes. Use downstream data to mitigate risk safely.

• Improve demand management processes. Synchronize demand across short- and long-term views.

Supply/Supplier Risk
In the AMR Research report, supply risks came in second with 60 percent of respondents concerned about logistics failures, and the third key concern was supplier relationships, which 59 percent identified as a critical risk.

And according to a recent Aberdeen Group survey on supplier performance and risk management, 62 percent of the 210 respondents said they think supply chain risk is increasing. Despite the expectation that risk will increase, Aberdeen's Supply Risk Increasing While the Market Stands Still reports that "only 50 percent of enterprises have a supply risk management currently in place."

In addition, 60 percent of executives surveyed by Aberdeen believe that supplier measurement and management programs "can help mitigate top risk indicators such as financial viability, supply disruptions and supplier dependency."

Yet nearly half (49 percent) of organizations "do not have supplier performance measurement and risk management programs in place," Vance Checketts, vice president of global supply management for Aberdeen Group, recently explained at Supply & Demand-Chain Executive.

Aberdeen recommends that companies perform as much due diligence as possible in the selection of supply partners and establish a continuous process for monitoring and improvement activity to ensure that supply disruptions are minimal.

The report also describes the approach adopted by best-in-class companies to protect their supply chain and reduce risk. The following are Aberdeen's recommended actions to control risk (at least as much as possible):

1. Focus on true risk factors, such as the financial viability and credit rating of suppliers, or organizational dependency on specific ones will help enterprises minimize supply disruptions.

2. Also, regularly measure more than half of your suppliers.

3. Use multiple sources, or establish these sources as viable.

In some cases, you may want to use contract hedging or other "insurance" practices.

Purchasing is not easy. But "best-in-class enterprises know what to look for to manage supplier performance and risk, and more importantly, to anticipate potential problems," says Aberdeen.

Earlier this month, Purchasing magazine pointed to a 2005 study of the financial effect of supply chain disruptions, noting that "the average effect of supply chain disruptions in the year leading to the disruption included a 107 percent drop in operating income, 7 percent lower sales growth and 11 percent growth in cost."

Though unpredictable disasters like earthquakes, hurricanes or terrorist acts typically wreak havoc on the supply chain, often other disruptions can be prevented by better risk management.

Resources

Supply Risk Increases While the Market Stands Still
by Andrew Bartolini, Vance Checketts and William Browning
Aberdeen Group, April 2007

Sector Insight: Supply Risk Happens in Your Industry
Aberdeen Group, April 23, 2007

Seven Areas of Focus To Reduce Demand Risk
by Lora Cecere and Mark Hillman
AMR Research, July 12, 2007

Corporate Risk Management Begins with Purchasing
by Paul Teague
Purchasing, July 14, 2007

Best Practices in Risk Management
by Paul Teague
Purchasing, July 14, 2007

Supplier Risk Seen Increasing, But Organizations Lack Performance Management Tools
Supply & Demand-Chain Executive, July 2, 2007