A supply chain FICO could save us from future chaos

Not so long ago, our economic supply chain was buzzing without too much concern. Then the disruptions of the pandemic, labor shortages, transportation problems, climate change, inflation and a bloody European war revealed just how fragile it all is. The challenge now is to be able to better assess vendors across networks to measure and manage risk in the same way we used other financial risk indicators in the past.

Most consumers are familiar with credit risk and the centralized function that FICO plays in protecting lenders' ability to trust the customers they lend money to. Regulators such as the FED, OCC, and FDIC are calling on financial institutions to take a more collaborative approach to vendor risk that lends itself to this kind of thinking. In the past, banks have pioneered risk-based approaches that protect the mechanics of our economy. Why should supply chain and supplier risk be different?

While consumers have this data ready on their smartphone at all times for everyday purchases, large companies have similar data to make decisions about the trustworthiness of people looking to borrow from them. We should have the same availability of data for suppliers who enter into delivery contracts.

We need financial institutions to take the lead from the top of the house. We have the precedent for this, in 1989 Dennis Weatherstone, CEO of JP Morgan, called for better visibility of his daily risk limits after the stock market crash of '87, Market Risk was launched a few years later.

Given the precedent of risk frameworks being developed in banks and then major industries later adopting them, you better bet Kellogg has a market risk team to track commodity volatility and Ford has a credit risk team that is strengthening its loan portfolio. It's more critical than ever to have a centralized vendor risk reporting metric that tracks vendor performance as they meet (or fail to meet) their contracts.

In the United States, a small step toward transparent data sharing was recently taken with the launch of the White House-sponsored Freight Logistics Optimization Works (FLOW) program. The 18 FLOW attendees include some of the world's leading logistics and transportation companies, such as FedEX and UPS. The group also includes regional players like the Albertsons supermarket chain and a few public sector members, like the Port of Long Beach and Los Angeles.

FLOW's goal is to provide a framework for generating a bank of transparent information on which participants can base their trading decisions and manage risk. But, according to the first participants, big questions remain about its effectiveness in terms of "supporting data sharing for supply chain improvement".

At the end of the day, we already know what the problem is: unreliable vendor performance data that puts our economy at risk. The good news is that we have precedent for this. We have the ability and technology to centralize supplier performance reviews and share learnings widely. What we don't have is a common standard for tracking performance and the historical data that goes with it. We need it to implement solutions in the future and to protect our economy from global events with local impact as we have seen recently.

To start raising the bar, we need a stronger commitment from North American financial institutions and governments to standardize and share data collection. FAPIIS/CSPAR data is an excellent starting point at the federal level. We need an agreement that can, and should, inspire similar action across the global supply chain network.

For inspiration, we simply need to look at our past and how we have been able to come up with adoptable frameworks that have been applied across industries, such as credit scores based on transparent and accurate data sets, to manage risk of...