1. July, 2009
Supply Chain Risks in the Uncertain
Economy: Grappling with Changes
Whether in good economic times or bad, volatility is the main factor Research Brief
increasing the extent of supply chain risks. Building on Aberdeen's research Aberdeen’s Research Briefs
in supply chain risk management over the past two years, this Research provide a detailed exploration
Brief analyzes the changing landscape of supply chain risks, corporate of a key finding from a primary
strategies to combat them, and highlights several third-party services and research study, including key
solutions that aim to solve these challenges. performance indicators, Best-
in-Class insight, and vendor
insight.
The Changing Nature of Supply Chain Risks
In a study conducted in July 2008 for the Supply Chain Risk Management:
Building a Resilient Global Supply Chain report, companies identified the events
shown in Figure 1 as the top disruptions to their supply chains over the
preceding 12 months.
Figure 1: Supply Chain Disruption Events Occurring over the Past
12 Months - Mid 2008
75% % of All Respondents
56%
49%
50% 45%
39%
35%
25%
0%
Supplier capacity Raw materials Unexpected Shipment delayed Fuel price
did not meet our price increase/ changes in / damaged / mis- increase/
demand shortage customer demand directed shortage
Source: Aberdeen Group, July 2008
Just a year later - but after the economy had plunged into a worldwide
recession - the landscape of supply chain risks has changed dramatically.
Aberdeen's recent survey of 209 companies for the Supply Chain Executive's
Agenda 2009 study, showed that demand-side challenges were now ranked
at the top. Supplier-related risks have shifted from suppliers not being able
to cope with their clients' excessive demand, to suppliers going out of
business because of the deteriorating financial and economic conditions or
because of their clients not maintaining the minimum level of orders. Figure
2 shows the changes.
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2. Supply Chain Risks in the Uncertain Economy: Grappling with Changes
Page 2
Figure 2: Supply Chain Disruption Events Occurring over the Past
12 Months - Mid 2009
75%
62%
50% 42% 41%
34%
24% 23%
25% 20%
0%
Reduction in Raw materials Fuel price Commodities Unfavorable Key suppliers' Supplier
customer price volatility volatility price volatility change in financial capacity did
demand currency standing not meet our
exchange rate deteriorated demand
Source: Aberdeen Group, June 2009
With one in five companies reporting that the deterioration of their
suppliers' financial position had disrupted their supply chain, it has become
critical for companies to have the ability to effectively monitor and manage
emerging supplier-related risks.
To combat the challenges of today's volatile economy, most companies have
begun more intensely focusing on the supply chain. Echoing the pains from
the disruptions outlined above, the top reported pressure driving companies
to improve SCM in 2009 is economic and financial volatility (40% of survey
respondents). In addition to this and other top pressures, one-fifth of
companies indicated that increasing risks were the reason for improving
SCM strategies this year. Considering these trends, it is not surprising that
formalized supply chain risk management has become one of the
differentiators among the top-performers. In the Supply Chain Executive's
Agenda 2009 study Best-in-Class companies are more than twice as likely as
Laggards to have a formalized process for managing supply chain risks (56%
vs. 25%, respectively).
Supply chain risk management has gained significant attention in the recent
years, after numerous quality, compliance, and security-related disruptions
had shaken even the major companies. Aberdeen's July 2008 study for the
Supply Chain Risk Management: Building a Resilient Global Supply Chain report
showed that most companies were still lacking the adequate processes and
capabilities to accurately assess and manage both supply and demand
network risks. In fact, less than one-third of companies in the 2008 study
reported actively managing each individual risk, including risks related to trade
compliance, raw materials, demand fluctuations, product quality, financial
instability, risk profile of suppliers and customers, currency volatility,
catastrophic events, logistics capacity and congestion, supply chain security,
and environmental disasters. There was also an evident disconnect between
the Enterprise Risk Management (ERM) function and supply chain risk
managers, where the ERM department often did not fully understand the
potential impact that supply chain disruptions could have on the business as
a whole.
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3. Supply Chain Risks in the Uncertain Economy: Grappling with Changes
Page 3
In these circumstances, formalized supply chain risk management has
repeatedly shown to be a Best-in-Class approach. This includes regular risk
assessments and the identification of clear operational response procedures
in case of disruptions. Companies need to evaluate their network-wide
vulnerabilities and put preparedness plans in place; they should also ask all of
their supply chain partners about their own risk preparedness plans.
Industrial Products Manufacturer Increases Focus on Supplier
Rationalization and Risk Management to Ensure Business Continuity
The Director of Procurement at a large global manufacturer of industrial
and high technology products describes his company’s recent supply chain
transformation journey; “The company has acquired many firms over the
years, leading to increased supply chain complexity and redundant
processes. The ensuing global recession led to some reduction in
customer demand for the company’s products and a higher awareness of
the importance of monitoring the financial condition of its suppliers.
Under these circumstances, inefficiencies within the global supply chain
network became more evident. In order to improve supply chain
performance, executive management set new goals for the supply chain
and procurement organizations to optimize the end-to-end processes and
reduce costs.”
The solution the large global manufacturer put in place addressed the
following problems:
• Business objectives were deployed across the organization to
drive supply chain rationalization and process optimization. Due
to many acquisitions, the company has a wide base of smaller
suppliers that are difficult to manage, so it set out to drive a 50%
reduction in the supply base. This initiative is still under way as it
has proved more difficult to achieve the target reduction level
without a larger-scale supply chain optimization program that
addresses manufacturing strategy and new product development
activities.
• To avoid the potentially disastrous effects of critical component
suppliers going out of business, the company has enhanced its
supplier risk and performance management processes. It has also
begun to work on creating back-up plans for alternative supply in
case any of its critical suppliers were to interrupt deliveries.
“Improving supplier risk management has not been easy,” explains
the Director of Procurement. “Many times suppliers are privately
owned and it is difficult to access their financial information; it is
also difficult to find enough staff to perform the checks on such a
large number of suppliers. Nevertheless, we now have a mandate
to review the higher-risk custom parts suppliers at least quarterly
and all others at least semi-annually. We are also currently
evaluating available tools for supplier risk assessment.”
© 2009 Aberdeen Group. Telephone: 617 854 5200
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4. Supply Chain Risks in the Uncertain Economy: Grappling with Changes
Page 4
Solution Snapshot
To address the growing challenges in supply chain risk management, many
third-party solution and services providers have begun introducing enhanced
monitoring and information services to help their clients improve their
supplier risk assessment and management capabilities. These services are
offered by different types of solution providers:
• Consulting services providers. Management consultants have
recognized that supply chain risk management is a highly under-
implemented area at companies that presents a fertile ground for
consultative engagements.
For example, IBM Global Business Services (GBS) offers a
comprehensive set of services to help clients assess their risks in
various areas, as well as estimate the overall vulnerability of their
supply chains. IBM GBS offers supply chain risk modeling using
mathematical approaches to analyzing risks and the services of its
consultants with expertise in specific industries and supply chain
areas. A recommended solution for risk mitigation may include
additional supply chain monitoring and control capabilities, supply
chain redesign, and new approaches to supplier information
management. IBM GBS also offers software solutions for supply
chain visibility and optimization if the need for them is identified
during the supply chain risk assessment.
Other consultancies focused on supply chain risk management
include PwC, Marsh, Deloitte, among others.
• Specialized supply chain risk management solution
providers. There are some specialized risk management solution
providers in the market, which focus on supply chain risk
management. For example, Protiviti - a specialized risk and audit
business consulting services provider - offers a set of services
targeted at uncovering and managing supply chain risks. Protiviti's
experts in supply chain risk management help companies identify the
sources of risk, define optimal risk response strategies, and build
long-term strategies for proactive risk monitoring and assessment,
including organizational, process and technology strategies. The
company is currently seeing the most demand from the market for
its supplier-focused risk solutions, although its capabilities
encompass both supply and demand network issues.
Other specialized providers in the supply chain risk management
space include New Momentum, among others.
• Best-of-breed software providers. These are existing supply
chain and procurement software solution providers that are adding
risk management capabilities to their solutions.
For example, Ariba - a provider of on-demand spend management
software solutions - has recently unveiled its new Supply Risk
Assessment Services - an information service that leverages Ariba's
© 2009 Aberdeen Group. Telephone: 617 854 5200
www.aberdeen.com Fax: 617 723 7897

5. Supply Chain Risks in the Uncertain Economy: Grappling with Changes
Page 5
extensive supplier information databases covering registered
suppliers using its procurement and spend management solutions.
This new service can be used both by the existing customers of the
Ariba platform and as a stand-alone service for companies that are
not yet using Ariba's software. The Supply Risk Assessment service
comes as a natural extension of Ariba's Supplier Information
Management and Supplier Performance Management solutions,
which offer broader supplier-related information and performance
management services. The Supply Risk Assessment covers global
spend category risks, supplier's financial health analysis using detailed
financial information and third-party developed risk profiles, as well
as relevant industry and market analysis to identify the impact on
supply continuity.
Other software providers that have recently introduced risk
management services include Aravo Solutions, CVM Solutions,
among others.
Generally, by improving overall supply chain management practices,
companies can create a less risk-prone environment leading to more
resilient supply chains. There are multiple consulting services and software
solutions available to resolve various supply chain issues: from functionally
focused (sales and operation planning, network design, global trade
management, transportation management, etc.) to "horizontal" solutions for
supply chain visibility, event and disruption management, supply chain
intelligence, etc. The solutions and services mentioned in this section
describe the additional capabilities and offerings beyond core SCM solutions.
To read more about supply chain best practices and solution in general, visit
our SCM page at http://www.aberdeen.com/channel/scml.asp.
Recommendations
Companies should re-visit their supply chain risk management strategy and
identify key supply chain risks and critical vulnerabilities:
• On the supply chain planning side, the processes that need to
include risk considerations include supply chain network design
efforts, sales and operations planning, and inventory planning.
• On the supply chain execution side, companies need to improve
their logistics and transportation management capabilities, secure
alternative third-party supply chain partners if needed, and ensure
pro-active alerting process and response management for
disruptions.
• Increased attention should be paid in the short-term to assessing
and managing supplier risks, especially during today's period of
increased economic volatility.
• In the long run, companies should adopt a holistic approach to
managing supply chain risks, weighing the risks, costs and returns of
various supply chain business models and strategies. All factors
© 2009 Aberdeen Group. Telephone: 617 854 5200
www.aberdeen.com Fax: 617 723 7897

6. Supply Chain Risks in the Uncertain Economy: Grappling with Changes
Page 6
should be taken into account, including supply network, demand
network, financial considerations and other factors impacting the
business overall. All these factors jointly should help companies pick
the right supply chain strategies and solutions.
• In addition, the Enterprise Risk Management group (if it exists)
needs to be fully aware of the potential impact of supply chain
disruptions on corporate business performance, and incorporate
supply chain risks into the corporate-wide risk management efforts.
For more information on this or other research topics, please visit
www.aberdeen.com.
Related Research
Supply Chain Risk Management: The Supply Chain Executive's Agenda
Building a Resilient Global Supply 2009: Weathering the Recession; July
Chain; July 2008 2009
Author: Viktoriya Sadlovska, Research Analyst, Global Supply Chain
Management (viktoriya.sadlovska@aberdeen.com)
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