How to avoid being pulled down by your suppliers

Jun 24 2009 by Nic Paton Print This Article

No one disputes that managers over the past year have had little option but to hack back hard on costs, lay off staff and stress-test their organisations to the limit.

The problem is that, necessary as such actions may have been to survive, they have also made many firms more vulnerable to and at risk from unforseen events or disruption.

They have become less effective at a day-to-day level and more at risk of suffering damage if an element of their supply chain goes wrong, such as a supplier or partner goes out of business, latest research has suggested.

A poll by the Institute of Chartered Accountants in England and Wales and disaster recovery firm SunGard Availability Services ahead of a round-table debate found that around half of employers believe redundancies and cost reductions have affected their day-to-day operations and increased their operational risk.

What's more, nearly two thirds suggested levels of operational had increased in the past year as companies have retrenched and cut back to the rump.

Seven out of 10 expressed concern that they were now as a result more at risk from any damage that might happen further down their supply chain, for example if a partner or supplier went bust, compared with a year ago.

And a third said these issues of risk and resilience were now assuming such importance that they were being discussed at board level.

The poll of chief financial officers, finance directors and heads of operational risk particularly highlighting the danger of disruption from the collapse of smaller, less resilient suppliers and partners in the difficult economic climate.

Roland Brook, associate director at accountancy firm Smith & Williamson, the threat of collapsing supply lines had become a real issue for many managers during the recession.

"Resilience has become much more of a major focus for our clients over the past year as many have had to contend with new threats such as supply chain disruption which have dramatically increased in the recession," he said.

"There is now a real understanding across many levels of business that firms simply cannot afford any interruptions to critical business operations," he added.

And Asim Balouch, group operational risk manager at financial services group Investec, said firms were becoming increasingly aware of the need to invest in this area, despite the financial straitjacket many of them were now having to wear.

"It's quite telling that most organisations are planning to increase investment in areas such as network and communications infrastructure, servers and security," he pointed out.

"Organisations are becoming increasingly aware that they cannot operate effectively without having a complete understanding of their data and the way that their IT systems underpins operational efficiency and integrity," he added.

But Keith Tilley, managing director UK and executive vice president Europe for SunGard Availability Services, said the good news was that this was now an issue being discussed and recognised at high levels.

"All organisations need to assess the impact that disruption to their supply chain could have on their business and have plans in place to continue normal operations should a supplier run into problems," he advised.

John Oates, chairman of the ICAEW's IT faculty, said the key was having at least some contingencies plan in place for disruption to your supply chain.

"In the last 12 months we have seen operational risk rise up the business agenda as organisations identify new threats to their business, not least that caused by growing numbers of redundancies, both in terms of loss of knowledge and malicious attempts by departing employees to exact revenge on their employers," he said.

Stress-testing in this context needed to be as much about working through the risk factors as planning for your day-to-day survival, he added. "More than ever, organisations need to create contingency plans that are watertight and workable, but also flexible enough to cope with the new and unexpected threats thrown up by the current economy."