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.

7 comments on “Supply Chain Issues Are a Leading Risk for Tech Execs, Part 1

  1. hwong
    May 17, 2011

    I am actually quite impressed with the  risk management of alot of our U.S. companies from the impact of Japan tsuami. At one point in time, there was a shortage for specific parts that was only produced by Japan. Even Apple's ipad and iphone supply chain didn't seem to have been as disrupted as I had expected. Perhaps management had a plan in place such as looking for a different vendor replacement. Because I can imagine that not having one piece of component can cause major delays even if all other parts are ok.

  2. Nemos
    May 17, 2011

    I believe the best way to protect the Supply Chain from the Issues described in the article is to apply in management the spread risk policy.

    It is easier to apply a prevent policy than to execute a Management risk.

    I am impressed that 83% of the companies have worries about psychical disaster but in the other hand most of them, they built their factories in one place.

  3. mario8a
    May 17, 2011

    Hi Barbara

    Currently in our company we are implementing a “risk management” system where we are looking for gray areas of opportunity and managing all possibles risks related to supply chain and process impacts.

    in the past we used to design products in a 2 year perdiod of time, today sometimes the products are obsolete in a couple years, this makes the supply chain a challenge for the procurement teams.





  4. jbond
    May 18, 2011

    Your article brings some interesting news. It is nice to see more serious thought going into all facets of the supply chain instead of having blinders on. It will be interesting to see how many companies actually commit to plans like these. These plans require a lot of factors to be in place, some of which require significant investment. With many companies looking at ways to compete with less spending, they might have serious problems by overlooking serious supply chain issues.

  5. SP
    May 18, 2011

    Agreed in any product design supply chain is the most risky area. Any supply chain issue can even lead to delay in the project or even go to the extent of killing the project.

  6. Barbara Jorgensen
    May 18, 2011

    Thanks for your input, readers and moderators. I initially was underwhelmed by the data as “risk management” comes up all the time in discussions. But there are many layers to risk manaagment, and the physical transport of goods is one of them. It's good to hear that companies are taking this seriuosly even before the earthquake. These concerns also are hindering companies' ability to expand, which I'll cover in a subsequent blog. It makes sense–until you have your current house in order, it's difficult to execute on expansion plans. So ultimately, it can hinder growth.

  7. hwong
    May 19, 2011

    @maria8a –

    Can you give some examples as to what you mean by “gray area” and how do you have plans to mitigate? I am very curious what companies do for real…

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.