As the impact of the worldwide downturn hits home for countries across the globe, many companies are worrying more about survival than profits. In a recent survey of 550 European and North American finance officers, 64 percent of respondents rate cost cutting as top priority and only 37 percent cite increasing profits as a main priority.

As a result, supply chain issues have come under the microscope on an unprecedented scale.

The good news is that supply chains hold the key to survival for companies caught up in the global economic downturn like never before.

According to J. Paul Dittmann, director of the Office of Corporate Partnership at the University of Tennessee, the most common concern among firms today is what they can do right now to reign in cost: "What are the quick hits — the 'low-hanging fruit?'

"Budget reductions may be necessary, but they certainly shouldn't be spread evenly. Now is the time for careful surgical cuts that don't cripple a firm for the future. It's time for tough decisions on what really is important for the future," Dittmann writes at IndustryWeek.

Considering that all supply chains are facing resource restraints, what changes should they make both to reduce immediate costs and to meet long-term goals?

"Most experts begin by emphasizing the one thing they should NOT do, which is to impose 'slash and burn,' across-the-board spending cuts," Global Logistics & Supply Chain Strategies (GL&SCS) says.

Rather, Frank Burkitt, principal at Deloitte Consulting LLP, advises cutting "bad" revenue that "undermines profitability" to start. "The idea of cutting revenue in a downturn might seem crazy, but simply put, some customers are not worth serving and some products are not worth selling," Burkitt says. "The shrinking margins that accompany an economic slowdown often only make the problem worse. Executives need to use top-down revenue cutting and bottom-up cost cutting approaches. Decide which revenue streams are not worth preserving and then target cost reductions."

(For more on deciding whether to start cutting costs or cutting revenue, see Deloitte LLP's "It's Time to Circle the Supply Chain Wagons")

There is another aspect to supply chains' high-priority cost containment. In PRTM's new Global Supply Chain Trends 2008-2010: Extended Edition, respondents identified improving cash flow and working capital as urgent concerns. In the survey of more than 75 global manufacturing and service companies, respondents across all industries now consider this their highest priority — even those considered "healthy" assume they may face challenges when seeking funding from financial institutions, due to stricter requirements.

(For more on reigning in costs, see PRTM's May 2008 "Global Supply Chain Trends 2008-2010: Driving Global Supply Chain Flexibility through Innovation" and Deloitte's October 2008 "Breathing Room: 10 Ideas for Squeezing More Working Capital from Your Supply Chain")

Supply chain visibility is yet another critical challenge.

IBM's 2009 Global Supply Chain Officer study, titled The Smarter Supply Chain of the Future, revealed that 70 percent of the nearly 400 supply chain executives surveyed consider "overwhelming and fragmented data," as well as an inability to understand that data, to be among their top challenges.

According to IBM:

Supply chain leaders understand the threat of information blind spots, but they are only cautiously optimistic that they are taking steps to use their valuable information for real competitive advantage. Just 16 percent indicated that they are effective at integration and visibility of information across the supply chain with external partners.

Risk is a challenge for almost every job function across nearly all organizations today. In April, we addressed how risk management has become a top priority of purchasing officers and discussed some strategies to handle risk.

Unsurprisingly, the IBM study also revealed that the No. 2 challenge for supply chain managers is having the visibility and flexibility to manage risk, with 60 percent of respondents saying risk is an escalating concern.

"Logistics and supply chain managers have always had elements of risk management in their job description in terms of dealing with an imperfect physical world of severe weather and natural disasters, damaged product, mechanical failures of the shipping conveyance, port delays, and amazingly, even pirates," John Brockwell, VP of Supply Chain Practice at J.P. Morgan writes in his company's Global Trade Services Newsletter this month.

The past year, however, has been unprecedented. Over the last 12 months, there have been a number of wake-up calls: tainted food and toys, random acts of terrorism and now a dramatic economic downturn spanning the globe, all destabilizing supply chains as trading partners economize or fail.

"The key to survival is preparation versus prediction," Brockwell writes.

In terms of building an adequate risk response strategy, CPO Agenda recommends:

• Identifying the risks most likely to affect the business and documenting their key drivers and characteristics;
• Assessing the probability and likely impact of identified risks on key performance metrics (e.g., earnings or cash flow at risk);
• Developing response strategies (avoid, transfer, mitigate, accept) that are consistent with the company's overall risk appetite, the portfolio of risks to be addressed and the need to deploy resources efficiently and effectively; and
• Monitoring the risk environment on an ongoing basis, and evaluating the performance of current risk response strategies.

Most companies fail to complete all four steps. One common problem is developing a one-time or intermittent approach without applying it in a consistent manner. On the other hand, the best-performing companies identify and quantify/qualify risks, craft appropriate responses and measure the effects of each response to refine the process.

(For additional ideas for reducing global supply chain risk, see Supply Excellence's two-part "Concrete Steps for Reducing Global Supply Risk")

There are many individual concerns supply chains have today, and we've only scratched the surface here. Other common problems persist: energy costs, increased scrutiny on regulatory oversight, product complexity, slow-moving inventory, functional silos, distribution strategies, globalization and outsourcing issues, resurgence of letters of credit, physical network problems, an amendment to the Lacey Act, and so on.

A large part of tackling these challenges comes down to increasing focus on supply chain flexibility, which is still considered the most critical factor for successful supply chains worldwide.

"Flexibility is the key," according to Lorcan Sheehan, senior VP of marketing at ModusLink, a provider of business process management solutions. "Companies need flexibility to protect against the downside and flexibility to react when things pick up," Sheehan tells GL&SCS.

"The economic crisis has forced all companies to look at ways to better control their costs and renew their capabilities across their global supply chains," Panos Kouvelis, professor of operations and manufacturing management at the Olin Business School of Washington University, recently said. "These days there is competition among supply chains, not just firms, and the better chains will win."

Strategic decisions made today will have implications far beyond the immediate throes of this crisis. Addressing new challenges on top of the old with the usual approach won't cut it. Companies need to refocus on their supply chain like never before to survive and, yes, even succeed in the market.

Or, as Dittmann at the University of Tennessee puts it: "Now is the time to rise above the sacred cows and make the organizational changes that need to be made. This is really an opportunity to get things right across the entire business."

Promising indicators point to organizations facing these issues head-on by refocusing their supply chains and improving business practices. When 200 purchasing professionals and engineers in manufacturing were recently asked to forecast company growth for MFG.com's May 2009 MFGWatch Survey, 82 percent expected to maintain or grow their business in the coming year.

Recent/Related

Top Supply Chain Challenges for 2009

Strategies for Cost Reduction and Risk Management

Risk Management a Top CPO Priority

Resources

The Cost of Control - Investigating the Issues Impacting Finance and Procurement
Basware Corp., June 2009

What's On the Minds of Supply Chain Professionals Today?
by J. Paul Dittmann
IndustryWeek, June 1, 2009

"It's Time to Circle the Supply Chain Wagons"
Deloitte LLP, April 20, 2009

Global Supply Chain Trends 2008-2010: Extended Edition
by Shoshanah Cohen, Reinhard Geissbauer and Michael D'heur
PRTM, June 17, 2009

Global Companies Say Recession's Impact on Supply Chains Has Been Hard-Hitting
PRTM, June 15, 2009

Global Supply Chain Trends 2008-2010: Driving Global Supply Chain Flexibility through Innovation
PRTM, May 2008

Breathing Room: 10 Ideas for Squeezing More Working Capital from Your Supply Chain
Deloitte LLP, October 2008

The Smarter Supply Chain of the Future
IBM, February 2009

IBM Releases 2009 Chief Supply Chain Officer Study: Volatile Times Demand Pervasive Visibility and Flexibility
IBM, Feb. 24, 2009

Supply Chain Risk, 2008-2009: As Bad as It Gets
by Kevin O'Marah
AMR Research, May 21, 2009

Planning for 2010 and the Future
by John Brockwell
J.P. Morgan, 2009

An Upside to the Downturn
by Stephen Finch, Ashley Hubka and Gregory Kochersperger
CPO Agenda, Spring 2009

Physical Risks to the Supply Chain: The View from Finance
CFO Research Services, 2009

Concrete Steps for Reducing Global Supply Risk (Part 1)
by Sundar Kamakshisundaram
Supply Chain Excellence, June 24, 2009

Concrete Steps for Reducing Global Supply Risk (Part 2)
by Sundar Kamakshisundaram
Supply Chain Excellence, June 26, 2009

Lacey Act
U.S. Department of Agriculture

Supply chain managers examine recession's impact on global business
by Melody Walker
Washington University in St. Louis, May 28, 2009

MFGWatch Survey Takes Pulse of North American Sourcing Community
MFG.com, May 27, 2009