Cost savings may be job number one today. But the current economic crisis portends an equally disturbing storm brewing on the horizon: heightened supply risk.

Earlier this week, SpendMatters Jason Busch sounded the alarms, noting that the number of outright supplier restructurings (Chapter 11s) and shutdowns (Chapter 7s) are both up considerably. “We’re going to see real problems brewing as we go into 2009,” writes Busch.

Unfortunately, that could turn out to be the understatement of the millennium. A little deeper digging paints a bleaker picture: According to the American Bankruptcy Insititute (ABI), 18,456 U.S. businesses filed for bankruptcy during the first half of 2008. That’s a 42% increase over the same period last year.

But, even that doesn’t tell the whole story. If you consider that economists last week (finally) acknowledged that the U.S. has been in a recession for more than a year, ABI’s records shows a whopping 106% increase in bankruptcy filings since this latest “R-word” era began.

And new projections suggest that filings will only increase in 2009. One of the industries hardest hit will be retail, which already has seen a 21% increase in Chapter 7 and 11 filings this year. A recent Wall Street Journal article cites “bankruptcy and turnaround experts expect early 2009 to bring a large number of bankruptcy filings by retailers, following what some retail analysts expect could be the weakest holiday season since 1980.”

The automotive supply chain will also take a beating, with analysts projecting a rash of new supplier bankruptcies, particularly among tier two and tier three suppliers who are less diversified and more beholden to the fates of Detroit’s Big Three.

And suppliers are equally concerned about their customers. The CPO at one of the U.S.’s leading regional financial institutions told me last week, “Risk is a big issue in our sector. Period. Our supply base is now doing as much diligence on us as we are on them.”

What does this mean? Quite simply, you will experience supply disruptions in the coming year. The real question is how to minimize both the impact and incidences of these risks. Some risk mitigation approaches you should be thinking of now:

• Audit the financial, operational, and balance of trade exposure of your most strategic and mission-critical suppliers. Too often investigation of supplier solvency and dependencies are limited to the initial sourcing project. You need only to open a newspaper or turn on the nightly news to realize that the health of even the seemingly most stable companies can degrade quickly.
• Look for early warning signs. Drops in quality or shipment delays can be indications that the supplier has cut too deep into its operations. More frequent requests for early payment or changes in sales and support personnel should also raise a red flag. While these symptoms may not necessarily belay supplier troubles, they should warrant further investigation.
• Increase the frequency of supplier performance reviews. Aberdeen Group research finds that, of those companies doing regular performance reviews with suppliers, more than two-thirds conduct these on an infrequent basis — quarterly, semi-annually, or annually. In the face of highly volatile markets where credit is tight, you should step up these reviews to at least quarterly with your most strategic and mission-critical suppliers and semi-annually with your next tier of suppliers. Pay close attention to issues like balance of trade and the underlying market dynamics for the materials that comprise inputs into your suppliers’ products. Spend Management execs report that these reviews also serve as prime opportunities to identify additional cost and waste reduction ideas.
• Automate your supplier management process. The above steps may be time consuming, but well worth the effort, considering the risk avoidance potential of these actions. Leading spend management organizations are simplifying this process by leveraging supplier management tools that combine self-service portal for suppliers to publish and manage their own profile information (and workflow for routing supplier profiles for review and approval); scorecarding and performance measurement utilities; and project management capabilities for corrective action management. Use of such tools can both improve visibility and control of risk and enable you to extend supplier management to a broader portion of your supply base.

For more tips on on how to assess and minimize supply risk in today’s economy, tune into the podcast, Supply Risk Management: Owning the Brand and the Supply Chain, with Spend Matters Jason Busch and Ariba Director of Spend Management Services Kris Colby (download here).