There was a time not long ago when our economic supply chain hummed along with not much worry. Then the disruptions of pandemic, labor shortage, transportation hiccups, climate change, inflation and a bloody European war have exposed how fragile it all is. The challenge now is to be able to better measure suppliers across networks in order to measure and manage risk the way we have used other financial risk metrics in the past.
Most consumers are familiar with credit risk and the centralized function FICO plays in safeguarding lenders ability to trust the clients they lend money to. Regulators like the FED, OCC, and FDIC are calling on financial institutions to lean into a more collaborative approach to supplier risk that lends itself to this kind of thinking. Banks in the past have led the way for risk-based approaches that safeguard the mechanics of our economy. Why should the supply chain and supplier risk be any different?
If consumers have this data ready on their smartphone at a moment’s notice for daily purchases, large-scale firms have similar data available to make decisions on the reliability of the people looking to borrow from them. We should have the same availability of data for suppliers who enter into contracts to deliver.
We need Financial institutions to take the helm of this from the top of the house. We have the precedent for it, in 1989, Dennis Weatherstone, CEO of JP Morgan made the call for better visibility into his daily risk limits after the Stock Market Crash of ’87, Market Risk was launched a few years later.
Given the precedent of risk frameworks being developed at banks and then large industries subsequently adopting-you better bet Kellogg has a market risk team for tracking volatility of commodities and Ford has a credit risk team shoring up their loan portfolio. Having a centralized supplier risk reporting metric that tracks the performance of suppliers as they deliver on their contracts (or don’t) is critical now more than ever.
In the United States, one small step toward transparent data sharing took place recently with the launch of the Freight Logistics Optimization Works (FLOW) program sponsored by the White House. FLOW’s 18 participants are some of the world leaders in logistics and transportation, such as FedEX and UPS. The group also includes regional players like the Albertsons supermarket chain and a few public sector members, like the Port of Long Beach and Los Angeles.
The goal of FLOW is to provide a framework for generating a bank of transparent information upon which participants can base their business decisions and manage risk. But, according to the initial participants, big questions remain around how effective it will be in terms of “data-sharing assistance for supply chain improvements.”
The bottom line is that we already know what the problem is: unreliable data on supplier performance that puts our economy at risk. The good news is that we have precedent for this. We have the ability and technology to centralize supplier performance ratings, and share learnings widely. What we don’t have is a common standard for tracking performance and the historical data that goes along with it. We need this to implement solutions going forward and to protect our economy from global events with local impact like we’ve seen recently.
To begin righting the ship, we need a stronger commitment from financial institutions and North American governments to standardize and share data collection–FAPIIS/CSPAR data is a great place to start at the Federal level. We need an accord that can, and should, inspire similar action across the global supply chain network.
For inspiration, we need to just look to our past and how we were able to come up with adoptable frameworks that were applied across industries, like credit scores based on transparent and accurate data sets, to manage the risk of new borrowers. Introducing a supplier performance score can help manage supply chain risks with better, faster, more accurate information that indicates problems may arise, rather than sounding the alarm.
The Covid pandemic changed the world. It also made very clear the importance of sharing accurate data on infection levels, hospitalizations and deaths. Critical information that’s swiftly circulating between public health agencies confronting new waves or variants and publicly viewable online today.
Now that we are aware of all the risks of an unstable supply chain, large-financial institutions–and, frankly, any organization operating with a large procurement footprint–should have the same tools and it should be on financial institutions alongside regulators and federal governments to implement and share with this new risk framework with the world.
