Study: Y2K May be the Weakest Link in the Supply Chain

Larger companies are getting very nervous about the Year 2000 readiness of supply chain partners. Over the next six months, many businesses may be put on notice that they are expected to be working toward Year 2000 compliance.

These are the findings of a new poll of 128 information technology (IT) managers in large organizations, conducted by Cap Gemini America (New York). More than half (55 percent) of the respondents "say they may not do business with suppliers of services or products who are not Year 2000 compliant," says Howard Rubin, CEO of Rubin Systems Inc., and an author of the study.

"Anybody we're doing business with that can't be compliant by the end of the first quarter of 1999 is putting us at risk," says John Ogens, director of Global Year 2000 program for Monsanto Co. (St. Louis). Monsanto has already been in contact with key business partners and suppliers, and has found about 42 percent of those have been determined to be "either already compliant, or on a good path to becoming compliant," Ogens reports. Another 10 percent have been "identified as somewhat at risk," he notes. "We'll have to make a business decision about our continued relationship with them." Still, another 36 percent of suppliers "have been reluctant to communicate with us as regards their status," he notes.

"It's a struggle to get companies and vendors to talk about their Year 2000 issues because of their concern around liability," explains Jim Woodward, senior VP of Cap Gemini America and head of its TransMillennium Services group.

From the perspective of large suppliers, it’s a matter of sitting down and working closely on the problem. "The first quarter of 1999 is a time where I start to get very nervous about those vendors not working closely with me on Year 2000," says Thomas Wilkie, director of risk management for Household International (Chicago). Wilkie notes that his company will "share any of the documentation or methodology that we have to help those folks."

Monsanto also is working closely with business partners to address Year 2000 concerns. "If the smaller to mid-size company is a critical supplier, we want to have a dialog or partnership with them, and provide whatever assistance we can, within reason, to make them successful so we can continue to be successful," says Ogens.

This concern about the state of the industry may be warranted, as the survey finds more firms are falling behind schedule. The percentage expecting to have more than half of their systems compliant by the end of 1998 declined from 85 percent in April to 81 percent. The percentage of firms missing Year 2000 plan milestones rose from 78 percent to 84 percent over the same period. "Virtually everybody says they are behind schedule in Year 2000 work, everybody's priority is really focusing on getting on track, and getting systems installed and tested, and corporations are really ready to say to one another, 'you'd better be Year 2000-compliant,'" Rubin says.

The survey also shows corporations are finding Year 2000 work unexpectedly expensive and difficult. The percentage of firms underestimating Year 2000 costs increased from 82 percent to 87 percent since December, with only two percent describing their cost estimates as "on target." Sixty-nine percent are unable assess whether they will be able to adhere to 1999 spending projections.

The incidence of Year 2000-related failures increased from seven percent in December, to 37 percent in April, to 40 percent in August. Another 86 percent expect an increase in system failures after January 1999. Types of failures included processing disruptions (87 percent of respondents reporting failures), financial miscalculation or loss (62 percent), logistics/supply chain problems (44 percent), and customer service problems (38 percent).

Two-thirds of the private sector respondents believe that Year 2000 compliance gives them a competitive advantage. Nearly six of ten (57 percent) expect that Year 2000 compliance will increase their market share, and more than a third (35.5 percent) may incorporate their compliance status into marketing messages. Nearly one-sixth (15 percent) say that their Year 2000 compliance status may lead to the acquisition of companies that might fail.

Survey respondents plan to accomplish the bulk of their Year 2000 work during 1999. Only 15 percent expect that more than three quarters of their critical systems will be "completely tested and compliant" by January 1, 1999. But 88 percent expect that at least 76 percent of these systems to be compliant by January 1, 2000. "Nearly half of the firms in the sample studied have decided not to do any Year 2000 testing at all. That's a disturbing conclusion," Woodward adds.

Respondents report that the top six priorities for the next 500 days are: systems installation, creation of an operating environment, ensuring desktop integrity, assessments and actions regarding vendors and business partners, dealing with the supply chain, and contingency planning.

"As you work on these issues, the challenges seem to grow and grow," says Ogens. "Business relationships are very complicated. Nobody does business totally internally. These interrelationships pose the greatest challenges for Year 2000. It's beyond finding needles in haystacks -- it becomes, to a certain extent, finding the haystacks first, before you can look for the needles."