What should a company do to get ahead of these issues? Simply shifting to a different low-cost country is no guarantee that these issues will not follow. Leading companies have prepared themselves by understanding where they are vulnerable, and by recognizing the untapped opportunity that exists with improved visibility and collaboration with suppliers.

Examining Suppliers (and their Suppliers)

Today's complex global supply chains require a higher degree of analysis than ever before. Instead of shopping around for the lowest-cost suppliers and assuming they will be able deliver on their promises, companies should set clear expectations for how suppliers operate and pop the hood on their operations to understand what's really going on.

A "code of conduct" sets the standard for how suppliers operate. But for many companies, it may not be worth the paper it's written on. To improve its value, the code should draw from leading standards such as the United Nations Global Compact, and should outline expectations for the suppliers' suppliers as well. Proper training is important so suppliers understand the code and are able to deliver against expectations.

Once the code of conduct is in place, attention shifts to evaluation of performance. And it should not just be on direct suppliers, but rather, multiple tiers upstream. If a problem occurs anywhere in the supply chain -- no matter how far removed – downstream parties can take a big hit. And thanks to social media, there's a good chance the public and media will find out about the problem first (a lesson many leading companies have learned the hard way).

Evaluating supplier performance should draw upon advanced analytical tools to ease the administrative burden and improve the insights delivered. Evaluation should include both regular "point in time" analyses and real time monitoring of potential risk events. Not all suppliers and product/material categories carry the same level of risk, and doing some preliminary analysis based on a host of criteria such as criticality of the supplier, level of spend, location, etc., can help companies take a thoughtful approach to allocating their time differently based on the potential risk of suppliers.

For suppliers that pose a higher potential risk, companies should take a more active approach to the "point in time" evaluation. These evaluations may include targeted surveys coupled with onsite audits. For lower potential risk suppliers, it might be sufficient to evaluate a sample set each year through a questionnaire.

Both the point in time and ongoing evaluations should be grounded in an understanding of the key risks inherent in the industry and geographies. This context yields tailored questions to ask and informs the importance that should be placed on responses.

Collaborate to Drive innovation and Growth

Engaging with suppliers is an effective way to identify and mitigate supply chain risk. But that's just one reason to do it. Even more important, it can help companies identify and capitalize on a wide range of cost reduction and revenue growth opportunities.

Mapping the value chain can clarify how product flows, who the specific supply chain partners are, and help highlight risks that need to be managed -- including people risks and natural resource risks.

Mapping and analysis exercises such as lifecycle assessment (LCA) often uncover simple changes that can yield timely benefits. For example, a leading beverage company performed an LCA and found opportunities to reduce its annual carbon emissions by 82,000 tons and save more than $40 million per year by making its shipping containers from durable, reusable plastic instead of fragile corrugated cardboard.

In other cases, tapping into opportunities requires active collaboration with certain suppliers. Although this may involve a bit more work, the results are often very worthwhile. In fact, a recent survey of roughly 1,000 supply chain executives found that organizations that engaged with suppliers at any tier were 38 percent more likely to achieve or surpass their expectations and have their initiatives result in cost reductions (2012 survey by Deloitte Consulting LLP, in conjunction with ASQ, Institute for Supply Management, and Corporate Responsibility Officer Association).

Plus, teaming with suppliers to design new products and processes may lead to radical innovations. For example, a motor oil producer collaborated with a packaging supplier to develop an innovative 6 gallon bag-in-box container which replaces 24 plastic bottles on motor oil. This innovation resulted in 89 percent less plastic landfill waste and improved transportation and storage space utilization by 50%. Such innovations can boost financial performance and get certain stakeholders (including employees, business partners, investors, and customers) excited about the company.

Effective collaboration requires trust and clear benefits for both parties. That's why it's important to design methods for sharing any monetary gains with suppliers. This gives them a tangible incentive for collaboration and implementation.

Turning Risk into Opportunity

In modern business, some of a company's work is actually done by its extended supply chain -- and is closely scrutinized by an increasingly connected world. Although this may create significant risks, it can also create new opportunities for improving aspects of business performance.

By working more closely with supply chain partners, companies can reduce the chances of supply disruption and help protect their reputation. But perhaps even more important, they can develop new innovations that reduce operating costs, boost revenue, and make their business more sustainable and resilient.

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