Strengthening supply chains

Viewpoints Operations

Image: supply chain disruptionsLike weak links, supply chain disruptions can severely affect business continuity and damage a company’s performance. In the current economic downturn— where bankruptcies, layoffs, and weak demand abound—relationships within global supply chains are being tested, and organizations are learning they need to focus on those relationships to ensure long-term business health.1 In times of economic calm, relationships between companies and suppliers are based mainly on cost, reliability, and quality. But even in stable times, a company’s supply chain risk management tends to be more reactive than proactive. Some companies and suppliers see emerging risks only within their own links in the chain, ignoring the forest for the trees. The result is that too few resources are applied to overall crisis management.

Such a myopic approach increases the likelihood that relationships will turn sour when supply chain disruptions occur. A study of 600 companies reporting supply chain disruptions over a 10-year period was recently conducted to measure the effects on the organizations’ overall performance.2 Compared with entities that reported no supply chain disruptions, these companies saw their share prices drop nine percentage points. And two years later, their average stock returns remained about nine percentage points lower than the returns of unaffected companies. In addition, their average returns on sales dropped about four percentage points one year after a supply chain disruption.

Many companies are beginning to learn that relationships with critical suppliers shouldn’t be taken for granted. Relationships must be acknowledged, protected, and nurtured to positively impact a company’s bottom line.

So, how do companies avoid such problems in the future? Instead of analyzing just the cost, reliability, and quality a supplier can maintain, some companies are also considering using critical suppliers. Those are suppliers that strengthen competitive position, improve public perception, and enhance supply chain security in addition to making the biggest impact on the bottom line. By using both risk and performance indicators, organizations are finding that they can focus on early identification of potential supply chain risks. During periods of economic volatility, it’s equally important to continuously monitor critical suppliers’ financial health as well as changes in their operational performance.

Many companies are beginning to learn that relationships with critical suppliers shouldn’t be taken for granted. Relationships must be acknowledged, protected, and nurtured to positively impact a company’s bottom line.
 


Supply chain disruptions can affect profitability
Percent of returns for companies affected by supply chains
Chart: Supply chain disruptions can affect profitability

Source: PwC, 10Minutes on supply chain risk management, 2009.

1 PwC, 10Minutes on supply chain risk management, June 2009.
2 PwC, From vulnerable to valuable: How integrity can transform a supply chain, December 2008.