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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.”