Supply Chain Issues Are a Leading Risk for Tech Execs, Part 1

Even before the disastrous events in Japan, high-tech executives were becoming acutely aware of the risks inherent in a global supply chain. In fact, supply chain issues represent one of the most prominent risks to US technology companies, according to a study by consultancy BDO. Of the 100 largest publicly traded technology companies analyzed, 86 percent stress supply chain concerns, including supplier relations, distribution, and material costs, as a top risk factor, reflecting a 15 percent increase over 2010 (75 percent).

The reasons for this heightened awareness are numerous, said Aftab Jamil, partner and National Director of the Technology and Life Sciences Practice at BDO United States, in a phone interview. "First, you have outsourced operations," he said. "You are exposed to the types of logistics issues you can expect when you have a components supplier located in one place and manufacturing in another. Then there are geopolitical issues; natural disasters; terrorism -- all of these play a role in supply chain risk assessment. Japan has since added significantly to those concerns."

As technology companies seek to secure business strategy goals, logistical interruptions or delays are seen as a major threat. According to the report, 75 percent of companies cite equipment failure and delays as risks, up from 2010 (64 percent) and 2009 (58 percent). The potential disruption to factories and distribution channels as a result of natural disasters and geopolitical issues is also a heightened concern for 81 percent of companies, up 26 percent over 2010 (55 percent). This marks a particularly notable jump, Jamil said, since these disclosures were made before the Japan earthquake. Companies are also significantly more concerned with the price and availability of raw materials (34 percent, compared to 19 percent in 2010) and balanced inventory (57 percent, up from 30 percent in 2010).

To address these issues, companies must first look inward and make sure they have their own disaster management plans in place. "There will be efforts made within companies themselves and within their supply chain to mitigate risk. We are beginning to see companies question whether they are handling their supplier concentration properly. Whether sole sourcing is a best practice. And whether or not they have a plan B, " Jamil said.

Another way corporations are managing risk is pushing those same questions down the supply chain. "Obviously, the bigger technology companies are going to have the resources and leverage to diversify their supplier base," Jamil said. "Some of the selection criteria factors that are coming into play are 'how are you going to service us if your factories are all based in Japan? Or in the Middle East?'"

With worries over product quality and inventory levels mounting, technology companies are also significantly more preoccupied with the inability to properly execute their corporate strategy (93 percent) than in 2010 (68 percent) or in 2009 (27 percent), according to the report. This marks a significant change in comparison to the relatively consistent rate seen in concerns over industry competition (97 percent) and economic conditions (96 percent), which remain the top two most frequently cited risks this year.

Concerns over the ability to execute corporate strategy have more than tripled in the past two years as companies are under pressure to get back into the game and stay ahead of the competition. “Still, executives are approaching growth initiatives with a ‘lessons learned’ attitude and honing in on the supply chain to safeguard against operational pitfalls that could lead to business interruptions or delays,” Jamil concludes.