Companies that are proactive in addressing risk management can gain a competitive edge
Over the last few decades, the world economy has become not only more global, but also increasingly hyper-connected.
Previously, a US company, for example, could source most of its inputs from within the country and so would have been to a large extent shielded from the impacts of global events.
But the increasing sophistication and reach of supply chains makes them vulnerable to a whole range of risks, including armed conflict, natural disasters and labour conditions in factories on the other side of the world.
“Supply chain risk management has become increasingly important because of the new and more complex issues that a modern company is exposed to,” says Charles Clark, chief executive of Rosslyn Analytics, a supply chain research firm.
Many companies are unprepared for this increased complexity, Mr Clark says, where events as disparate as the Swiss National Bank suddenly dropping its support for the Swiss franc, oil prices halving within six months, Russia annexing Crimea and cyber attacks from North Korea can all affect companies and their suppliers. “Many Fortune 500 companies will take four to six weeks to ascertain their exposure to Switzerland, for example,” he says.
Then there are longer-term trends, such as climate change and resource scarcity, and the growing array of rules and regulations that attempt to manage these challenges. “It’s a lot easier to pass legislation than it is to keep up within it,” says Adrian Chamberlain, chief executive of supply chain consultancy Achilles. The global cost of complying with legislation, from whether your product uses conflict minerals to how you are tackling climate change or bribery and corruption, is around $60 billion, he says.
As the horsemeat scandal in the UK and Europe demonstrated in 2013, it is not enough to know what is going on at your first-tier suppliers, you need to have visibility of their suppliers too. “Multinational companies are increasingly being held liable for their second and third-tier suppliers, but it is very difficult and expensive to keep track of them,” says Mr Chamberlain.
Increasingly, companies recognise the need to take risk management in the supply chain seriously. “But there is a gap between the willingness to address the issue and the ability to execute,” he adds.
There is quite a range of “maturities of approach”, says Matt Elkington, head of enterprise risk management at PwC. “We still see some fairly basic practices from companies you would think would be more sophisticated.”
Most companies only wake up to the risks that lurk in their supply chains when something disastrous happens, he points out. High-profile recent examples include the impact of the Japanese tsunami on the global electronics industry and the effect of the 2011 floods in Thailand on many key suppliers to the world’s carmakers. “It’s much better to be proactive. This has as much to do with collaboration, technology, keeping up with legislation and using their economic leverage, as customers – to bring about change in their suppliers,” says Mr Elkington.
A growing number of companies are realising that managing supply chain risks well is a way to get ahead of competitors, says Sung In Marshall, principal analyst in human rights and societal risk at Verisk Maplecroft. “Companies can easily fall into the trap of only looking at risk, but addressing some of these risks can be a massive opportunity.”
Many companies are unprepared for increased complexity
Collaboration can bring real benefits because competing companies often have the same issues to deal with and use the same suppliers. If they can identify areas of common concern, it cuts out duplication and reduces the burden on suppliers – and can almost halve the cost of compliance.
One company that has sought to increase its collaboration and get ahead of regulatory trends is AkzoNobel, which as one of the world’s largest chemicals groups, is highly exposed to the volatility of oil and gas prices, as well as the pressure to reduce carbon emissions. One way it is responding to this is by increasing the amount of bio-based materials it uses. “This requires the bringing to life of entirely new supply chains,” says Peter Nieuwenhuizen, director of future-proof supply chains at the company. “We’ve also had to convince people that we want to work in partnership because we cannot do this alone.”
Previously, companies did not have the same strategic objectives, but today they are more receptive to the idea of collaboration. “Many companies are trying to make their supply chains more sustainable, but struggling with how to do it in practice. Collaboration fits in with many businesses’ objectives today,” he says.
Another global giant looking to future-proof its supply chains is Mars, the food group, which has just announced plans to reduce deforestation in its supply chains for beef, soy, pulp and paper. “It is becoming increasingly unacceptable to encourage deforestation. We want to be ahead of that trend,” says Barry Parkin, Mars’ chief sustainability officer.
The new policies are driven not just by a desire to do the right thing, but the increasing transparency of supply chains. “There is no place to hide in the world today. Anyone can now see real-time satellite images of people starting fires in plantations. The level of transparency has increased dramatically,” he says. “A corporation like ours has to know where everything comes from and be assured that it is being sourced in a responsible way. Decades ago, it was acceptable to not really know where your materials came from – we just dealt with our tier-one suppliers. But that won’t do today.”
RISING FROM THE ASHES
In April 2013, more than 1,000 people lost their lives in a fire at Rana Plaza, a building housing five garment factories in Dhaka, Bangladesh, while a further 2,000 were injured – the disaster had lasting implications
The tragedy drew global attention, not just because it emerged that at least 27 global garment brands had current or recent orders with the five factories at the time of the fire, but also because many of those who died had been ordered back into the building even though it had been evacuated the day before because giant cracks had appeared in the walls.
As a result, the fire threw a glaring spotlight on global clothing brands and their responsibility for the workers who make their products in factories across the world, in terms of safety, working conditions and wages.
Unlike previous garment factory disasters, this time the industry reacted rapidly. More than 190 companies, including many whose products were not made at Rana Plaza, have signed the Accord on Fire and Safety in Bangladesh, a legally binding and independent agreement designed to make all garment factories there safe workplaces. Signatories include adidas, Marks & Spencer, Matalan, Sainsbury’s, Tesco and Primark.
Primark was one of the brands most under scrutiny as a company that prides itself on the cheapness of its clothes. Immediately after the disaster, it confirmed that one of its suppliers occupied the building and issued a statement of condolence. Within two weeks, it had announced a package of compensation for workers affected by the fire and the families of the dead, and soon after it confirmed that it would sign up to the accord.
When it became apparent that the industry-wide mechanism for compensation payments was becoming bogged down, it committed to make short-term payments to workers and dependents of anyone involved in the fire, not just those producing Primark clothes, as well as funding food aid for about 1,000 families.
Within two months of the disaster, the company announced a programme of building surveys to assess the structural integrity of factories from which it sources garments, because the implementation of the accord would take time.
After one of its first inspections, it asked a supplier, Liberty Fashions, to evacuate an unsafe building and offered support to help it do so. When the company refused, Primark terminated its contract.
As other brands continued to wrangle over the details of compensation, Primark committed to make further compensation payments in October 2013 to all 3,600 Rana Plaza workers, even though most were working for their competitors, and called on the rest of the industry to do the same.