Focus moves to more than these ‘known unknowns’

As lines of supply become more complex and exposed, it may be time to rethink our approach to supply chains, writes Malory Davies

The alarm bells started ringing in September last year. Hornby, supplier of toy railways to generations of British children, told shareholders it was facing “substantial disruption to supplies” just as it was entering the crucial Christmas period.

The share price dropped 30 per cent and sales fell as it struggled to mitigate the disruption resulting from a rationalisation programme being implemented by a supplier in China.

And to underline the speed that a supply-chain problem can turn into a crisis, it was only a couple of months earlier that Hornby’s management were explaining the supplier’s plan to shareholders saying: “While this may result in some disruption to shipments in the short term, we believe that it will result in more reliable supplies when completed.”

While Hornby is getting back on track, it has received a harsh lesson in the realities of supply-chain risk. It’s no longer about a little local difficulty, it’s about profits, the share price and ultimately about global trade.

Now risk specialists are starting to suggest that we have to rethink our approach to supply chains. To put it bluntly: are many supply chain strategies simply too risky?

For the past decade the aspiration has been to lower supply-chain costs through leaner and leaner operations.

Corporations have to unlearn some of the supply-chain fundamentals learnt in the past decade to create more dynamic supply-chain structures

But the past few years has seen the level of supply-chain volatility rise significantly as a result of a number of factors. These have included social and political unrest, natural catastrophes, financial failure of suppliers, industrial disputes, and corporate social responsibility (CSR) issues with suppliers, such as the use of child labour or non-compliance with health and safety requirements. Such factors are recurring themes at the Extended Supply Chain conference which takes place in London next month.

Hardly surprising then that this has become a hot issue for the World Economic Forum. A report, Building Resilience in Supply Chains, published at last month’s meeting in Davos highlighted the fact that more than 80 per cent of companies are now concerned about supply-chain resilience.

Jonathan Wright, global lead on logistics and supply chain at Accenture, one of the architects of the report, says: “It’s clear that we are operating in unprecedented levels of volatility.” As a result, he says: “We need to think about supply chains differently.”

The focus must be more on resilience, he says, and points out that commercial companies tend to focus on the “known unknowns” – these are the traditional business risks that organisations have learnt to manage. Generally they have got good risk mitigation plans for these.

It is in dealing with the “unknown unknowns” that companies have more problems. This includes natural disasters, terrorist attacks and so on. Here it is governments that have developed more expertise.

“And, as supply chains become more global, private-sector organisations become more exposed to these unknown unknowns,” he says, arguing that there is a real value in public and private-sector organisations working together to create more resilient global supply chains.

For many years the driving trend for businesses has been to reduce costs. This has seen a move to low-cost sourcing and the development of supply-chain clusters to drive efficiency. As a result supply chains have become longer, more complex and more vulnerable to disruption.

Mr Wright is clear that the supply-chain strategies developed ten years ago are less relevant today. “Corporations have to unlearn some of the supply-chain fundamentals learnt in the past decade to create more dynamic supply-chain structures.”

The impact of cataclysmic events has been well documented. But political unrest has caused significant disruption in the past couple of years, perhaps most notably with the Arab Spring.

Richard Wilding, a specialist in supply-chain risk at Cranfield University, points out that social unrest can be a lot more unpredictable; it can also be longer term. “The Arab Spring continues to spring. The region is still relatively unstable,” he says. “You have to recognise that some locations are risky.”

Professor Wilding argues that increasingly supply chain directors are going to have to get involved in building relations with such incoming governments to ensure that they understand what the business is trying to do.

When you have new people coming into government, your supply chain can be the victim of unintended consequences. So it is important to have senior people liaising with new government ministers to build understanding. “Supply chain directors increasingly need to be politicians,” he says.

Nick Wildgoose, global supply chain product leader at Zurich Insurance, points out that, while earthquakes and revolutions tend to grab the headlines, the single largest category of disruptions is IT failure.

This highlights the fact that people tend to assess risk on emotion and instinct rather than rationally, a point made by David Bosomworth, sustainability practice leader at consultancy The Sequoia Partnership. “Companies need to be objective in quantifying risks,” he says.

He points out that a strategy to mitigate risk is like an insurance policy and has to be assessed in terms of its overall value. For example, he says, if an event only happens once every 20 years, do you insure against it or simply accept that you are going to take a hit every 20 years?

Mr Bosomworth stresses the importance of agility and speed of response in the face of a problem, noting history has shown that organisations which can respond quickly in a crisis can win a massive competitive lead.