When internal inspectors at Georgia Nut Co. discovered salmonella in the company’s pistachio products in March, they immediately instigated a product recall downstream to their customers—including Back to Nature Foods, a Wisconsin firm owned by Kraft Foods Inc. that used the nuts in trail mix—and launched an inquisition to locate and eradicate the source of the contamination.

Consumer confidence is a delicate issue, especially considering the recent spate of similar recalls affecting a variety of products, and executives understood the potential damage such an incident would do to the company’s brand. However, Kraft was prepared and had the ability to track and trace ingredients and products both downstream to retailers and upstream through its supply chain, and rapidly identified and recalled suspect shipments, and traced the contamination to its source—a supplier in California.

“As part of our food safety program, we have systems in place at both Kraft plants and external manufacturers that help identify potential issues before they become problems,” says Adrienne Dimopoulos, a spokesperson for Northfield, Ill.-based Kraft Foods. “We require extensive monitoring and quality testing throughout the production process, and we require that each supplier and external manufacturer have a food safety plan in place.”

Because Kraft caught the problem early, it was able to avert the potential damage to the company’s brand. However, other companies haven’t been as diligent about their supply chain practices, or as fortunate when issues arise.

More recently, Peanut Corp. of America (PCA), Lynchburg, Va., filed for bankruptcy under Chapter 7 in a Virginia court after salmonella in its products led to 600 people falling ill, and as many as eight deaths in the United States. Some 1,800 products were stripped from retail shelves in one of the largest recalls in U.S. history. The contaminant was traced to irrigation water at a Mexican farm that supplied the company. Under Chapter 7, the company liquidates its assets to repay creditors, rather than reorganize. PCA will cease to exist.

Risk exposure

These are just a few examples of risks that manufacturers are exposed to through their supply chains. Others include pathogenic outbreaks such as H1N1 flu (originally referred to as swine flu) closing factories or—even worse—borders; Somali pirates seizing the ship transporting your materials; earthquakes and hurricanes; wildly fluctuating transport and commodity prices; and, last but not nearly least, the economy. The survivability of one of your key component suppliers has become more than another “what-if” scenario in too many cases. And these are just the acute factors, the headline grabbers.

“Risk management has become a tremendous issue for the global supply chain,” says Bob Ferrari, an independent supply chain analyst and blogger. “[A severe incident] could literally take down your brand.”

The economic crisis has been particularly bad for manufacturers, says Ferrari. “In the age of Just-In-Time, a lot of companies really embraced Lean Manufacturing processes. When the downturn hit in the late part of 2008, production literally just stopped all over the globe. So now, basically, supply chains are sitting there without inventory, waiting for signs of recovery. In China, there are reports of thousands of factories that have shut down. This started in low-margin businesses like toys and apparel, and has spread to more robust industries like consumer electronics.”

Analyst Noha Tohamy at analyst firm AMR Research Inc., in Boston, agrees. Supply Chain Risk (SCR) has become one of her primary focus areas, and she conducts a quarterly survey of procurement executives to see what risks are top-of-mind and what strategies they are implementing to ameliorate them. “A lot of companies have seen a lot of their suppliers file for bankruptcy,” she says. For example, Toyota has more than 100 suppliers at risk of becoming financially insolvent.
 
The results of the most recent AMR survey, conducted in February, showed that reduced consumer spending had become the top risk. In December, this issue was a distant sixth, following rising fuel costs, rising transportation costs, commodity price volatility, intellectual property infringement and supplier product quality failures. “This was the first time a demand issue became the top concern. It’s usually on the supply side. [Supply chain managers] don’t know what demand is going to look like post-recovery. They need to plan for the recovery and don’t know how to change their manufacturing or sourcing because they don’t know what’s going to come next.”

Collaboration key

The top mitigation strategy in that survey was closer collaboration with suppliers. “People have been doing collaborative business continuity planning for a long time, but what’s really ...