Just after noon on Nov. 1, the chairman of the company that owned China Top Industries, a shoe factory in Dongguan, China, made a surprise announcement to his assembled workers: the factory was closing, effective immediately. Then he climbed the wall surrounding the factory and fled, leaving behind a mountain of bad debts.

The closure shocked almost everyone, from the 2,000 employees who had arrived that morning thinking their jobs were secure to China Top’s American customers, who were left with a sudden, gaping hole in their supply chain.

But in far away New York City, one person saw it coming: Josh Green, co-founder and CEO of Panjiva, a startup that provides analysis on overseas suppliers for the apparel industry. “On October first, according to our data, [China Top] had had a drop-off in output,” Green said. “So we had a good indicator a full month ahead.”

It was still too early in Panjiva’s development to share the analysis, Green said. But in the coming months his firm will begin to offer the sort of detailed information currently missing from the supply chain risk environment: Using powerful database software, Panjiva sifts through mountains of information—much of it from the U.S. government—to develop detailed analyses of firms’ quality, social responsibility, and financial health.

It’s the sort of data that experts say is desperately needed in an economy where almost every company relies on some sort of global supply chain. These days, “You need to know a lot more information a lot earlier in the supply chain, and you need to be able to validate [your supply chain] on a moment’s notice,” said Stephen Lamar, executive vice president of the American Apparel and Footwear Association.

It’s hardly news that lengthening global supply chains mean increased risk. But for too long, U.S.-based companies have been unaware of, or unwilling to address, the issue, taking out insurance if necessary and praying for the best. “Less than one-third of all participants [in a recent Aberdeen survey] are actively managing those risks,” said Viktoriya Sadlovska, an analyst with the research firm Aberdeen.

Which is strange, because supply chain disruption is hardly a rare phenomenon. In a 2008 survey, Aberdeen found that 99 percent of responding companies had experienced at least one recent disruption, including 56 percent who said their suppliers couldn’t meet their demand and 39 percent who said their shipments had been delayed or damaged. “Risk monitoring of your supply chain is vital when you’re looking at export-import markets,” said Rick Ostopowicz, a spokesman for credit insurer Euler Hermes.

And yet too many companies caught in the “rush to revamp their supply chains,” concluded a 2006 report by the insurance and risk management firm FM Global, “often unknowingly take on greater exposure to natural disasters, lower safety standards and less reliable legal systems.”

But with the global economy tanking, risk perception is growing. “The driver has been to explore the savings from globalization,” said Sadlovska. But with the worldwide downturn shuttering emerging market factories virtually overnight, she said, “Suddenly they see the other side of global business.”

As the economic crisis works its way around the globe, experts expect to see things worsen. A separate Aberdeen survey, taken in 2007, found that 62 percent of firms expected to see their supply chain risk increase in the next three years. Nevertheless, only 49 percent said they had implemented a risk analysis and management program.

Then there is the question of natural or manmade calamity, from tsunamis to earthquakes to riots and political upheaval.

Quality is a big risk issue as well. Massive recalls of China-made products, from analgesics to stuffed animals, has raised concern over the ability of U.S. companies to monitor, let alone guarantee, the quality of the products they are purchasing. Many have never sent representatives to visit the factories making their goods, and even those that have often see their agents return with incomplete pictures, having been unable to communicate with local management, steeped as it is in a different language, management culture, and regulatory structure.

Not everyone is taking things lying down. Supply chain risk management is a growing niche for consultants, while several large multinationals, ranging from Mattel to Cisco, have developed robust in-house risk management practices. Several others, including Nokia, Toyota, and FedEx, have banded together to form the Supply Chain Risk Leadership Council, which works with shippers, logistics firms, and government agencies to develop best practices for dealing with supply chain risk. One company, Alcan Inc., even conducts background checks on executives at potential business partners. But the vast majority of firms have neither the resources nor the willingness to perform such intensive analyses.

Supply chain risk management is just one part of an even larger trend in the industry. As global supply chains become global supply webs, with multiple suppliers and multiple clients working together in a dynamic economic ecosystem, there is a growing need for firms that can facilitate and make transparent the thousands of decisions taken every day to make things run—from trade finance to compliance to social responsibility.

An alumnus of the Boston Consulting Group and Harvard Business School, Green teamed up with MIT computer engineer Jim Psota in 2006 after hearing horror stories of naïve customers and poorly run suppliers.

Indeed, there are more than 77,000 global suppliers in the apparel industry alone, and almost no source of objective information to separate the good from the bad. The global supply chain, “is a world that has been incredibly opaque,” said Green. “It is as far from transparent as you can get. I think the reality is, a lot of people have benefited from that. There are middle-men who have been brokers who keep buyers and suppliers apart from each other. People are getting information and hoarding it and making money.”

At the heart of Panjiva is a powerful set of computer programs that mine reams of government data for information on supplier shipments. That lets the company see which suppliers shipped on time, how loyal their customers were, and whether their output was increasing or decreasing—sudden spikes in either direction raise a red flag, because they might indicate that either the supplier is taking on too many commitments or its output capacity is plummeting.

An analysis of the Guangzhou Apparel Company, Inc., based in Nanjing, China, for example, reveals that the company has shipped an average of 25,663 kilograms of material to 294 U.S.-based customers, and that the average customer sticks with it for 136 days, putting it in the top 56 percent for customer loyalty. These an other data points combine to give the company a score of 89 on Panjiva’s rating scale, just a point below “excellent.”

Panjiva will soon supplement this data with a Web 2.0 innovation: user reviews. “Customer loyalty is a great indicator of quality,” said Green. The result, he said, is a sort of Zagat’s guide to the global apparel industry.

Green and Psota began fundraising in spring 2007 and launched the site later that year. “There wasn’t good detailed information for retailers and importers about the underlying nature of the facts from sourcing product. In fact, most information was just ads for the [supplier] companies,” said Jonathan Glick, an early backer who runs the angel investment firm Edge Ideas. “What these guys are doing is absolutely revolutionary.”

What did exist, Green and Glick said, was an astounding array of advertorial and middle-man sites that provided biased or incomplete information on suppliers with little to no critical data. The website alibaba.com, for example, provides basic information on thousands of suppliers and their products—but the data comes from the suppliers themselves. “The kind of information you’re going to get from a service like that will necessarily reflect the factory’s perspective and not necessarily the importers’ perspective,” Glick said.

Another method for analyzing suppliers is to contact other companies for leads. The problem, says Kitty Dickerson, chair of the Textile and Apparel Management Department at the University of Missouri, is finding people to talk. “One company is often not likely to share their factory sources because, if they’ve found good factories, they do not want to share them,” she said.

That leaves the middle-man firms, which offer to find and introduce suppliers to customers. But these are still few and far between; almost no one yet has enough expertise in both the U.S. and Chinese business worlds to be an effective sherpa. And too many of those firms that do exist are vague about their own relationships with suppliers. “We’re still in a situation where people are operating in the dark, having to take leaps of faith, place big bets, or work through middle men that they can’t necessarily trust completely,” said Green.

What began as an effort to help customers find new suppliers has, especially in the current economy, turned into a tool to help customers keep an eye on the suppliers they already have. Five-thousand-mile supply chains that reach deep into foreign countries (and foreign business cultures) can be difficult to manage.

“Quality, the very definition of quality, the definition of timeliness, the definition of the perception of too late or on time across cultures can differ significantly,” said Kobus van der Wath of the Beijing Axis, a consulting firm. “In China, even the meaning of time, as opposed to in the West, is quite significantly different.”

Such differences are particularly important in times of economic turmoil, when clear information about a supplier’s continued operations is vital. Even in good times, serious supply chain disruptions can be life threatening. According to a 2005 paper by Georgia Tech’s Vinod Singhal and the University of Western Ontario’s Kevin Hendricks, it usually takes at least two years to recover from a supply chain problem, resulting in a 33 to 40 percent drop in share price relative to their industry. Supply chain failures reverberate through the entire corporate structure, affecting payroll, marketing, and reputation.

Even occasional disruptions, such as delayed shipments, can have significant consequences. “Yes, one major disaster can wipe out a company or product line,” wrote FM Global in its recent paper. “But, so can a series of minor disruptions. If companies are consistently a week late meeting customer demand, for example, or if retailer’s shelves routinely are not stocked with their products, the chances of staying in business fall precipitously.”

In response, this past fall Panjiva rolled out a new alert function. Similar to the fraud prevention notices put out by credit card companies, Panjiva Alerts notify clients whenever shipping data indicates suspicious activity by one of their suppliers—say, a delay in delivery, or the loss of several customers. “Let’s say a company has had a huge drop-off in the amount it is shipping, year over year,” Green said. “That may well be a sign that the company may be in trouble.” But as long as a particular customer is getting their shipments on time, they may be completely unaware of problems elsewhere.

Such dynamic data analysis has also allowed Panjiva to launch two related products: the Watch List, a compendium of poorly performing suppliers, and the Pain Index, which it calculates by combining the percentage of active suppliers that become inactive (i.e., have not shipped to the U.S. in three months or more) and the percentage of active suppliers on the Watch List.

Recent results are ominous. In December, the number of active suppliers to the U.S. had dropped 70 percent in three months, from 22,099 in July to 6,262 in October. Forty percent of those remaining were on the Watch List.

Green is the first to admit that Panjiva is hardly a one-stop shop. When looking for a new supplier, there is no substitute for site visits, product sample analysis, and face-to-face discussions.

But without some idea of where to start, customers often make decisions on which suppliers to consider based on poor data, and they stay with faulty suppliers for the same reason. “People have had to tolerate a level of risk that comes with doing business across borders that is unnecessary,” Green said. wt



Contributing editor Clay Risen writes on global trade issues from Washington, D.C.