Video"Smaller factories are now going out of business much more quickly," says Sherwin Krug, chief operating officer of MFG.com, an online marketplace that connects buyers and suppliers worldwide. Indeed, in China alone more than 70,000 companies went bankrupt last year. "Performing due diligence is now more important than ever, especially when dealing with suppliers in locations like China," Krug says.
But a company with a thousand geographically diverse suppliers can't keep tabs on each one by dropping in like Sam Walton helicoptering to the local Wal-Mart for a quick look-see. "Managing the risk throughout the supply chain now means taking a systemic view," says Gary Lynch, global leader of Marsh's supply-chain risk-management practice. The goal is to build a system that can detect and work around any major supply-chain weaknesses.
Planning for the Worst
The challenge is to determine what constitutes a "major" weakness. (For a list of top supply-chain risks, see "Weak Links" at the end of this article.) Cisco carefully chooses where it reinforces its supply chain, deploying whatever solutions are deemed appropriate. "We choose the level of intensity we want to apply," says Kevin Harrington, Cisco's vice president of global business operations.
Cisco's central assumption is that some suppliers — 600, actually — are more rigorously examined than others. They are critical contributors to its 100 highest-revenue products and account for a chunk of its supply-chain spending. The financial implications of any disruption within that group could, of course, be costly. A delay could be "unacceptable to our customers and to Cisco," says O'Connor. "The last thing we want is some unforeseen thing happening to a critical supplier."
Given that the company has more than 8,000 products in total, that universe of 600 suppliers is, in fact, extremely select. For suppliers dubbed mission-critical, Cisco evaluates their resiliency in a worst-case scenario — how long it would take to restore the site to 100 percent operational output should the facility be wiped out — on a semiannual basis. Members of the company's supply-chain crisis-management teams, which are organized by geography and function, take many factors into account, including the specialized material or equipment that needs the longest set-up time; the lead time associated with receiving any raw material or component; and the time it would take to qualify anything on the supplier's end, from a new facility to new equipment. The options for acting on such risk include switching to a different site owned by the same supplier, identifying and qualifying a second supply source, and implementing a risk-inventory buffer.
And then there is the financial assessment. "We drive them through the same resiliency and mitigation program, except we don't consider alternate sites," says O'Connor. "If it's a bankruptcy, that option is not going to help us." And he has good reason to expect that Cisco will have more opportunities than ever this year to get over suppliers that go under. Standard and Poor's recently predicted that the corporate bond default rate (an indicator of corporate bankruptcies), which started the year at under 5 percent, will reach at least 14 percent by December.
That's a startling increase, but it doesn't surprise O'Connor. Very little does. Other companies may want to act now to reduce their own capacity for surprise. If they don't, they may be living in a state of perpetual shock.
Josh Hyatt is a contributing editor of CFO.
More Red Tape
A rising tide of regulation threatens to clog supply chains.
Global supply chains have long had to contend with vast amounts of red tape. There are more than 600 laws and trading regulations to adhere to, overseen by at least 35 regulatory entities. Newer regulations may catch many companies by surprise. Here are three to watch out for:
10+2. Effective January 2009, this rule compels importers to transmit 10 specific pieces of information to U.S. Customs and Border Protection before a U.S.-bound ocean vessel can be loaded for departure from a foreign port. The vessel itself must contribute two data points at least 24 hours before departure. Intended to help Customs identify high-risk shipments, the rule is an extension of the 24-hour advance manifest regulation that took effect in 2003.
"It's part of a trend we've seen since 9/11 to prevent the wrong goods from falling into the wrong hands," says Andrew Siciliano, a partner in KPMG's Trade and Customs Services practice. To comply with 10+2, companies must notify their supply-chain partners and ensure that needed contract stipulations and IT resources are in place.
The Lacey Act (amended). A wildlife protection law that dates back to the McKinley Administration, the Lacey Act was amended in 2008 to include imported plants and timber. The intent is "to make sure that a shipment has been legally harvested," says Siciliano. That adds a significant new layer of work for importers.
Consumer Product Safety Improvement Act. Previously slated to take effect in February 2009, this act has been delayed until February 2010. It requires importers to ensure that products intended for children under age 12 are tested for lead content before being shipped to the United States. — J.H.
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