Chain Reactions - June 2012 - IFPSM Article

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Chain reactions

June 2012

Supply chain horror stories are becoming common, with high-impact events taking their toll on global lines of supply. But there is a much wider spectrum of potential disasters that would send investors running for safety, says Dan Quinn.

The far-reaching consequences of supply chain disruption, supplier failure and damage caused to a brand through supplier malpractice are all too readily visible as horror stories in the press. These are incidents that undermine market confidence and directly impact corporate profitability and shareholder value.

The potential for such horrors to strike has increased dramatically in recent years with the emergence of highly complex and greatly extended supply chains. Lines of supply for all manner of goods and components traverse the globe within tight time frames, with minimal inventory as back-up. Just-in-time processes keep supply chains lean, but such distances make them extremely vulnerable to disruption.

A significant number of high-impact, low-probability ‘black swan’ events hit supply chains in 2011, with the New Zealand earthquake, the Japanese tsunami and floods in Thailand. The Japanese tsunami in March caused huge disruption to automotive and technology supply chains. Parts shortages from the Japan earthquake impacted car production worldwide, costing hundreds of millions of dollars in lost production for the sector. Floods in Thailand last autumn caused further chaos when clusters of specialist hard disk drive manufacturers were inundated, removing a third of global production capacity for a highly sought after components for notebooks.

Corporations are becoming acutely aware of the impact such supply chain issues have on the financial performance of the business. Reflecting this, findings from research conducted by Achilles (http://www.achilles.com) and IFF Researc

(http://www.iffresearch.com) h into attitudes to supplier pre-qualification indicates that

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.

But are events of this nature really so unlikely? Every year natural catastrophes occur. Shouldn’t we be planning and mapping out our critical supply chains with regards to their exposure to risk, both natural and otherwise? How aware are we of the full spectrum of issues, particularly from our suppliers, which present significant risk to our supply chains and company share value? What is clearly needed is a more holistic view of supply chain risk.

High risk

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Page 1 of 3Chain reactions | Global purchasing

22/06/2012http://www.ifpsm.org/ezine/features/chain-reactions

Supply chain risk, with all its potential horrors, 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 reputational damage from a supplier using child labour or failing to comply with health and safety standards. Then there are risks surrounding exposure to fraud, litigation and corporate social responsibility issues.

The Achilles research reveals 43 per cent of businesses are aware of a high-risk supplier failing to meet compliance requirements. In addition, 8 per cent of organisations interviewed believe more than half of their suppliers are ‘high risk’ – defined as suppliers whose ‘financial failure, failure to deliver or failure to comply with relevant legislation or regulation would cause significant financial cost and/or reputational damage’ to the buyer.

Interviews conducted as part of the research offer some interesting insights:

A supplier was fraudulently identifying parts. They went to jail as a result. Our company had to reaccredit our suppliers.”

•

“We’ve had companies that have had a guy killed on the site. We stopped dealing with them.”

•

“The use of substandard labour by [supplier] caused damage to our brand reputation.”

•

“We use subcontractors a lot in the construction industry – and our supply chain is international. In the past two years, it feels as if we’re just one small step away from bankruptcy.”

•

“Because we are a water company, quality is an issue. We could be sued if something goes wrong – and then there is the problem of bad publicity.”

•

According to Nick Wildgoose, global supply chain proposition manager at Zurich

(http://www.zurich.co.uk) : “Research we did with the Business Continuity Institute

(http://www.thebci.org) last year found 85 per cent of companies had suffered some

kind of significant disruption in 2011. That wasn’t perhaps so surprising. But for the first time, we looked at where this disruption was occurring and 40 per cent of the disruptions were below tier one,” he says. “The focus of those few companies taking the lead in this area is on tier one. Very few of them are tracking back through the tiers – even for their most important components or their most profitable products.”

Wildgoose poses two highly pertinent questions: what are your tier one suppliers doing about their own supply chain resilience? And how are you checking that?

There are plenty of examples of companies whose reputation and brands have been badly damaged by a supplier, or sub-supplier, being non-compliant with a buying organisation’s corporate social responsibility (CSR) policies. Few outside the retail sector consider the damage that may ensue from the discovery a boiler suit used by a major oil company was produced using child labour, or that a hose component sourced by an engineering company was manufactured under appalling working conditions. No company can divorce itself from the errant policies and practices of its suppliers. As those in the retail sector have determined, ethical audits of suppliers is a necessary process for reducing exposure to this potentially highly damaging source of risk. It is important that other sectors, too, recognise the importance of monitoring suppliers in this way.

However, results of the Achilles research indicate 62 per cent of buyers seem unconcerned about the risks suppliers present to the reputation of their business, with only 38 per cent ranking it in their top three most important risks to manage. Larger companies are more in tune with exposure to CSR issues, with 23 per cent of those organisations with turnover between £250 million and £999 million, putting their most important risk faced as managing their brand and reputation, while smaller companies are more focused on financial risks.

Financial failure of a supplier has been a particular risk to the supply chain in recent years. “The horrors in the chain can come from insolvency as much as physical damage – particularly, when you go down the chain,” says WIldgoose. “Often, companies are unaware of an important component coming from an SME at a lower tier. It could be that the SME has a financial problem and is in danger of collapse. So buyers need greater visibility of lower tiers and what’s happening on those levels.”

The research confirms buyer anxiety regarding supplier finances. The report finds that the second most concerning risk for buyers is that of a supplier going out of business. Nearly half (48 per cent) were concerned about the financial failure of suppliers’ businesses and put it in the top three risks they have to manage. 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.

Critical checks

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.

Wildgoose advocates mapping out the critical supply chains to understand where the key production sites and critical raw material sources are, so you can more readily see your exposure to such risks as natural disasters or areas of potential civil unrest. But he also emphasises the importance of checking less obvious risks, such as those relating to intellectual property (IP). He says there are many instances of companies negating to carry out simple checks on whether a supplier has been involved in any issues surrounding IP infringement. A simple, inexpensive check could save many millions of dollars.



Health and safety is another area where horror stories abound. Risk from suppliers failing to be compliant on Health and Safety issues can have a hugely damaging impact on a buying organisation’s reputation. And that is apart from the great disruption, high costs and potential for litigation that can result from a supplier’s actions, or lack of actions, at whatever tier. If a fatality occurs on the buyer’s site, it is going to be the reputation of the buyer that suffers. Ensuring that a high-risk supplier’s management processes relating to Health and Safety are robust is critical to off-setting this potentially, highly damaging risk.

Mitigating the risks presented by suppliers is dependent on having accurate supplier data. However, most CPOs are unaware of the poor state of their databases and are consequently at great risk.

Whenever we work with companies across the globe, almost always the senior managers of the procurement department have been shocked at the poor quality of their own data, when they had believed it was significantly better than it really was. Gaining a clear view of your supplier base, with access to pertinent information that has been qualified, evaluated and monitored is absolutely essential to avoiding the horrors that can, and regularly do, strike the supply chain.

☛ Dan Quinn is new sector development director at Achilles (http://www.achilles.com)

