In the past month and a half, hurricanes Katrina and Rita knocked many companies' supply chains completely offline. Suppliers had to close down facilities in the Gulf Coast region and wait out the storms, shipments couldn't make it to port, and railroads and roadways were blocked for days.

Managing supply risk is a major challenge, says United Technologies' Scott Singer, director of global supply (right with Ken Marcia, director of supplier development). Photo by Jason Grow

It's not just Mother Nature that can cause an interruption. There are terrorist attacks and wars with which to contend. Slowed economies can hurt sales, while an economic boom can push some companies beyond their limits. Changes in tariffs and customs, as well as environmental and other regulations, also can affect the chain of supply. Adding to the concern, most companies have spent the last few years squeezing out excess supply-chain costs and cutting supply inventories to a minimum so that even a little problem can have a major effect on the bottom line.

United Technologies Corp. is no exception. While the flow of supplies required to build its industrial machinery and equipment wasn't disrupted during the recent hurricanes, some of its machine shops that supply components to its assembly sites weren't able to operate, business offices were shuttered, and employees evacuated.

But if the hurricanes had compromised United Technologies' supply chain, it would have been prepared. The $37.4 billion-a-year company has a window into its supply chain that few companies have: a strategic system that measures and watches the performance of all its 23,000 suppliers and alerts United Technologies whenever a problem arises that could affect the flow of supplies into any of its businesses. The goal is to circumvent a crisis by knowing beforehand if a supplier is headed for financial trouble, slips in quality, or has difficulty delivering an order, and then taking proactive steps to fix the problem.

The manufacturer's supply chain is made up of multibillion-dollar suppliers and million-dollar machine shops, and it links together more than 300 large factories in the world's most advanced countries as well as tiny ones in less-developed regions. Like most companies, United Technologies has been simplifying its supply chain. In January 2003, the company kicked off Operation Transformation, deploying lean-manufacturing techniques and building a lean enterprise across its supply base, factories, and business divisions, which include Carrier heating and cooling systems, Hamilton Sundstrand aerospace systems and industrial products, Otis elevators and escalators, Pratt & Whitney aircraft engines, Sikorsky helicopters, UTC Fire & Security, and UTC Power fuel cells.

"With a globally diverse supply base supporting our different businesses, it becomes a major challenge to manage the supply risk to UTC," says Scott Singer, director of global supply. "So we've focused on technologies that are going to give us the surveillance capabilities to assess that risk so we can zero in on problems and fix them before they happen."

The concept of assessing and managing supply-chain risks seems obvious, but surprisingly few companies have embraced it. In a study of 180 companies conducted by the Aberdeen Group, 82% experienced supply disruptions within the past 24 months, even before Katrina and Rita. The typical company reported 12 supply disruptions or outages last year, and the most commonly cited problems include poor-quality or damaged goods (50%), missed or late deliveries (49%), unexpected increases in supply costs (47%), longer lead times (33%), and supply capacity constraints (32%).

Yet 55% of the companies the Aberdeen Group surveyed don't have formal metrics and procedures for assessing and managing supply risks. The findings are alarming, says Tim Minahan, the Aberdeen Group's VP and managing director of supply-chain research, especially considering so many companies are operating without any redundancies or backups in their supply chains. "There's no buffer," Minahan says. "Companies are realizing, 'We went out and did all this cost-cutting, and now we we've exposed ourselves to increased risks.'"

That realization, though slow in coming, is now hitting home. In fact, of those that have no plan or procedures for measuring supply risks, 39% say they'll have a plan within a year, and another 9% say their plans will be in place within two years.

United Technologies chose Open Ratings Inc., which offers businesses access to a comprehensive database of records for more than 50 million companies around the world, including their financial and operational performance, and benchmarking data that compares them with their competitors. The database, offered as a subscription-based, hosted-application service, is regularly updated by culling information from several hundred data sources such as county courthouses, consumer complaints, and government agencies such as the U.S. General Services Administration and the U.S. Department of Labor's Occupational Safety & Health Administration. Open Ratings' more than 30 customers pay an average of several hundred thousand dollars annually for the service.