Critical chain reaction

Glob­al sourc­ing may deliv­er advan­tages in the form of cheap­er prod­ucts, but the extend­ed sup­ply chains that sup­port this flow of goods have become far more vul­ner­a­ble.

The Japan earth­quake and tsuna­mi of March 2011 dra­mat­i­cal­ly illus­trat­ed the risks, caus­ing huge dis­rup­tions to auto­mo­tive and tech­nol­o­gy sup­ply chains. Parts short­ages from the Japan earth­quake impact­ed car pro­duc­tion world­wide, hit­ting Toy­ota, Nis­san and Hon­da, in par­tic­u­lar. Floods in Thai­land last autumn caused fur­ther dis­rup­tions.

“In terms of pro­duc­tion dis­rup­tions, the Thai­land floods were worse for us than the tsuna­mi in Japan,” says Stephen Harley, exec­u­tive direc­tor of mate­r­i­al plan­ning and logis­tics at Ford Motor Com­pa­ny. “A cou­ple of key sup­pli­ers were under more than two metres of water for a con­sid­er­able peri­od of time and they had crit­i­cal parts for region­al pro­duc­tion.” Divers worked in alli­ga­tor-infest­ed waters along­side float­ing cranes to retrieve the dies crit­i­cal to pro­duc­ing the parts, he says. With­in three weeks the parts were back in pro­duc­tion at a new loca­tion.

Unsur­pris­ing­ly, then, KPMG’s lat­est glob­al con­sumer mar­kets report, Turn­ing glob­al risk into oppor­tu­ni­ty, finds that com­pa­nies are show­ing a greater inter­est in risk. Week­ly reviews by finance lead­ers and their boards have dou­bled, from just over sev­en per cent to 19 per cent, com­pared to two years ago. In a sep­a­rate report, more than 90 per cent of those sur­veyed by the World Eco­nom­ic Forum indi­cat­ed that sup­ply chain and trans­port risk man­age­ment had become a greater pri­or­i­ty in their organ­i­sa­tion over the last five years.

By mak­ing strate­gic change — which is absolute­ly essen­tial to the suc­cess of the busi­ness — you are putting risk in

“Sup­ply chain dis­rup­tions have a sig­nif­i­cant impact on share­hold­er val­ue, because they under­mine the con­fi­dence of all stake­hold­ers in a company’s abil­i­ty to deliv­er,” says Nick Wild­goose, glob­al sup­ply chain propo­si­tion man­ag­er at Zurich. “It’s crit­i­cal that a com­pa­ny under­stands the risks asso­ci­at­ed with its strate­gic sup­pli­ers, by map­ping their loca­tions and under­stand­ing the threats to them and their asso­ci­at­ed logis­ti­cal infra­struc­ture links.” Zurich has been work­ing with a num­ber of com­pa­nies to build risk tools that help them main­tain sup­ply chain resilience.

Tsunamis may present dra­mat­ic images of sup­ply chain fail­ure but sup­ply chain risk comes in a mul­ti­tude of forms, rang­ing from phys­i­cal dis­rup­tion due to nat­ur­al dis­as­ters, trans­port fail­ure or civ­il unrest to the finan­cial impact of a sup­pli­er going out of busi­ness or fail­ing to com­ply with health and safe­ty stan­dards. Then, of course, there are risks sur­round­ing expo­sure to fraud, lit­i­ga­tion and cor­po­rate social respon­si­bil­i­ty issues.

New research con­duct­ed by the sup­pli­er infor­ma­tion com­pa­ny Achilles, work­ing with IFF Research, indi­cates that chief pro­cure­ment offi­cers (CPOs) regard a supplier’s abil­i­ty to deliv­er in terms of qual­i­ty, time­li­ness and cost as their most impor­tant risk to man­age. Some 75 per cent put it in their top three risks. A sup­pli­er ceas­ing to trade is also seen as a major risk, with 48 per cent rank­ing it in their top three. These find­ings reflect cur­rent con­cerns over the present frag­ile eco­nom­ic con­di­tions.

Yet some 62 per cent of buy­ers seem to be rel­a­tive­ly uncon­cerned about the risks sup­pli­ers present to the rep­u­ta­tion of their busi­ness, with only 38 per cent rank­ing this in their top three. Risk from expo­sure to lit­i­ga­tion is also com­par­a­tive­ly low on the rank­ing, at 24 per cent.

Mit­i­gat­ing the risks pre­sent­ed by sup­pli­ers is depen­dent on hav­ing accu­rate sup­pli­er data. As the Achilles report high­lights, the sec­ond most con­cern­ing risk for buy­ers is that of a sup­pli­er going out of busi­ness. Although cred­it avail­abil­i­ty may be a lit­tle bet­ter than it was a year or two ago, the finan­cial secu­ri­ty of many sup­pli­ers remains an open ques­tion. “Buy­ers face the con­tin­u­ing risk of a sup­pli­er going under, main­tain­ing the prospect of inter­rup­tions or fail­ure in the sup­ply of crit­i­cal com­po­nents and ser­vices,” says Mr Maund.

“If a sup­pli­er is vul­ner­a­ble it is worth know­ing about it in advance. That way an alter­na­tive sup­pli­er may be sought, or if the sup­pli­er is a sin­gle source for a vital com­po­nent or ser­vice, action may be con­sid­ered to help that sup­pli­er. Either way, pre­dic­tive finan­cial tools and up-to-date cred­it rat­ings on sup­pli­ers is the only way of reduc­ing expo­sure to this very real risk.”

The abil­i­ty of a busi­ness to quick­ly adapt its sup­ply chain to changes in the com­mer­cial envi­ron­ment is seen as key to reduc­ing sup­ply chain risk. But most com­pa­nies find strate­gic change a dif­fi­cult process and one which can also involve its own risk expo­sure.

The results of a three-year glob­al research project under­tak­en by Cran­field School of Man­age­ment and Solv­ing Efe­so, enti­tled Sup­ply chain strat­e­gy in the board­room – the real­i­ty, reveals the very sig­nif­i­cant risks asso­ci­at­ed with imple­ment­ing strate­gic sup­ply chain change. Accord­ing to the report, only 2 per cent of sup­ply chain strate­gies are imple­ment­ed smooth­ly, on time and to bud­get, with two-thirds being either aban­doned or suf­fer­ing sig­nif­i­cant imple­men­ta­tion dif­fi­cul­ties.

“Risk is nor­mal­ly viewed from the per­spec­tive of what hap­pens when things go wrong or what might go wrong with an exist­ing oper­a­tion,” says Pro­fes­sor Alan Waller, vice pres­i­dent of sup­ply chain inno­va­tion at Solv­ing Efe­so and vis­it­ing pro­fes­sor at Cran­field School of Man­age­ment. “What peo­ple don’t tend to look at is the risk of doing new things and get­ting it wrong.

“Peo­ple talk about tak­ing risk out of the busi­ness, but actu­al­ly by mak­ing strate­gic change, which is absolute­ly essen­tial to the suc­cess of the busi­ness, you are putting risk in,” he says. “There­fore, you need to take the cor­rect set of actions to change a 50:50 spin of the coin into a 99 per cent prob­a­bil­i­ty of a suc­cess­ful out­come.”

Bouncing back from disaster

For a great num­ber of organ­i­sa­tions, the Japan earth­quake of 2011 and the recent floods in Thai­land have thrown the vul­ner­a­bil­i­ty of their sup­ply chains into stark relief.

Stephen Harley, exec­u­tive direc­tor, mate­r­i­al plan­ning and logis­tics, at Ford Motor Com­pa­ny, puts a great deal of the company’s pre­pared­ness for events such as the Japan earth­quake down to ear­li­er work on col­lect­ing data on low­er-tier sup­pli­ers under­tak­en in 2009, fol­low­ing the dra­mat­ic fall in demand for vehi­cles as a result of the glob­al finan­cial cri­sis.

Hav­ing in place access to real-time data across mul­ti­ple tiers in the sup­ply chain allows you to find res­o­lu­tions rapid­ly

“We devel­oped a big data­base of tiered sup­pli­ers because of the finan­cial risks,” he says. “We hadn’t thought about sup­ply risk in terms of a [nat­ur­al] cat­a­stro­phe at that stage. But the data was the same. You need­ed to know the loca­tion and the pro­duc­tion capa­bil­i­ty at a deep­er tier than we were usu­al­ly inter­est­ed in.”

Bob God­frey, vice pres­i­dent Europe, the Mid­dle East and Africa (EMEA), at E2open, believes more com­pa­nies are begin­ning to realise they need to address sup­ply chain risk by look­ing across mul­ti­ple tiers of sup­pli­ers in this way. “Hav­ing in place access to real-time data across mul­ti­ple tiers in the sup­ply chain allows you to find res­o­lu­tions rapid­ly, whether it’s redi­rect­ing assets or the allo­ca­tion of scarce com­po­nents,” he says. “By hav­ing busi­ness process­es already in place, when you have a dis­rup­tion you already have access to the infor­ma­tion and are able to take the best action to resolve it.”

On envi­ron­men­tal risk, Paul McNeil­lis, direc­tor of Best Foot For­ward, sug­gests lead­ing com­pa­nies are seek­ing a fuller under­stand­ing of their expo­sure to sus­tain­abil­i­ty risks asso­ci­at­ed with their brands, cat­e­gories, prod­ucts and mate­ri­als.

“They are start­ing to build on their sup­pli­er com­pli­ance lev­el pic­ture of risk,” he says. “Once they have insight into hotspots, they are act­ing to reduce their impacts, and turn­ing risks into oppor­tu­ni­ties for sav­ing cost and dri­ving brand inno­va­tion.”

Global sourcing may deliver advantages in the form of cheaper products, but the extended supply chains that support this flow of goods have become far more vulnerable.

Bouncing back from disaster