Eight ways to reduce supply chain risk

Both recessions and recoveries present huge risks to your supply chain. So we've sought out eight tips to help you get a grip on customers and suppliers.

* Get some visibility - and think long-term

Until you know exactly where the vulnerabilities in your supply chain are, you can't control them.

"A lot of people in business - especially salespeople-find it difficult to price risk into a contract," says "Sue", who was frank with FM about her risks in exchange for anonymity.

"I'm an accountant, so I don't find it difficult.

And it's up to me to make sure that we're aware enough about how our own business works that we price in supply chain risks properly, especially in bigger deals."

Sue is talking principally about customer contracts - where it's all too easy to be seduced by a big sale. "I think we were lucky not to have won some of the big contracts we tendered for in the past," she says.

"Fulfilling them is only one issue - it's what happens when it's up for renewal.

If you lose it at that stage, you could end up in trouble." And issues such as the distraction for management when you have a particularly big customer are rarely factored in as supply chain risks. So think in the round.

* Scenario-plan failures

What happens if a key supplier changes its prices or its product? How about a serious breakdown in logistics - a three-day no -fly zone over western Europe?

"Contingency planning is essential," says Alan Braithwaite, chairman of supply chain consultancy LCP. "You need to have some idea of how you would cope with a fuel blockade, say, or a major customer or supplier going bust. Ask 'what would we do the next day?' And remember that while some risks are quite short-lived -and, with a reasonable amount of initiative, your people can probably cope - others are much more dramatic and will put you over a cliff."

* Be realistic with customers

The sales team thinks it knows who your best customers are. But only finance can see exactly how much the organisation commits to service each customer and what effect that has on performance.

"When you have a big customer - especially one that's looking to drive out cost or working capital - you have to work twice as hard," says Peter Hatherly, until recently CFO of Simple Health & Beauty, which sells to most of the big supermarkets.

"You don't get any brownie points for having your products off the shelf. But you also have to stay profitable."

Sue adds: "We're getting smarter as a management team. It's less about winning big contracts at any cost now.

We've learned that we need to dictate the contract terms to manage the risks of the flow of work being uneven, the amount of resources we need to deploy rising - or the client not paying its bills on time."

* Go nuts with credit management

Dun & Bradstreet calculates that 90 per cent of companies regularly grant credit to at least one customer without obtaining any references.

That introduces a "can't pay" risk as well as a "won't pay" one.

It's not only new customers. Existing clients - particularly those with big orders or who are on more generous payment terms - should be assessed periodically using a credit agency.

And, according to experienced FDs, client visits by worldly-wise financial managers are extremely valuable. It's easy to lie or list only your best contacts on a credit-reference form, but it's hard to hide an office or factory in trouble.

* A plan - and a man (or woman)

It's not only credit application processes and strict terms and conditions that need to be considered.Logistics and operations also need to control supply-chain risks.

"You need the processes to be clear," says Edward Gower-Isaac, FD-turned-MD at R R Donnelley's Desing & Print Management Services. "You need to make sure that client and supplier interactions are recorded properly.It doesn't mean adding in bureaucracy; it simply means ensuring that you have an approach that's adhered to."

It helps to have someone who knows how these systems work - and where they need to flex.

"It's a balancing act," says Toby Cotton, FD of the Risk Advisory Group. "Having stock all over the place means you have cash tied up. But using just-in-time systems means that you can be unresponsive to the market. They're both risks. So you need clever senior people.

That's why we've seen the emergence of board-level supply-chain professionals."

* Accountability is vital

According to a recent report by CIMA, one of the big advantages that Tesco has in managing supply chain risk is its flat structure. Although it employs 470,000 people, it has only five levels of management. That means accountability for risks is very clear. And, when individuals identify supply chain weaknesses, they're generally close enough to a decision-maker to ensure that they're addressed.

"Initiative is hugely underrated in managing risk," says Gower -Isaac. "Process is great. But, particularly on complex jobs, your people are probably going to have to deal with the unexpected from time to time.If they're not too reliant on the system, and they really understand how the supply chain fits together, they can use their initiative to overcome problems much more quickly. This means that the FD or MD has to empower them, too."

* Keep talking

Every business faces a cash squeeze now and again. Both during a recession (when profits are scarce) and in an upturn (when you're committing cash to growth), it's possible that you'll need your supply chain to be a little more flexible on terms.

"It's all too easy to ignore this until things get desperate," says "Dan", an interim FD who specialises in turnarounds (and also wishes to remain anonymous). "At one business I went into, the managers had forgotten that without their key equipment supplier they'd have no way of bringing in new customers. They had simply delayed payments and hoped the deliveries would keep coming. So my first job was to have a frank discussion with the manufacturer about a way forward." That applies to the nature of supply as much as financial relationships. "The simplest way to manage risk is to communicate our own requirements well in advance," says Gower-Isaac. "If they know what we're up to, our key suppliers can plan better, making the whole chain much smoother."

Supply chains are simply connections between organisations, so relationships underpin them. "If you try to manage they supply chain process too much in the back office, you're increasing the risk," says Hatherly.

"It's no good only having your logistics guy talk to their logistics guy. You need commercial relationships - you need to be able to bring in senior managers, or the buyers and salespeople, as allies when things start to go wrong."

* Always watching

"We're working with two clients at the moment that are facing huge declines in sales caused by lack of supply, not lack of demand," says Braithwaite.

"The problem is that the supplies they can get are not quality-assured to the standards they require - and they can't risk substandard products of their own going out as a result." Monitoring, then, is the final piece of the puzzle.

"We outsourced a lot of our supply," says Hatherly. "The keys to controlling those risks are service-level agreements,clear expectations and openness. But you have to be confident in the quality and reliability of supply, too. That means your technical guys need information far enough out to allow them to plan - and you need to factor in quality-assurance visits to your suppliers regularly to ensure that they're doing all the right things."

Financial Management