Risk - is it time to bring supply chains home?

Many of these might be considered one-off risks that illustrate the fragility and vulnerability of global supply chains. While some of these are unavoidable, they do have the effect of undermining confidence in global supply chains and a number of them could have been predicted. Other risks emerge over time and might actually lead to specific events occurring. These include access to resources such as water, demographic shifts and climate change.

 

Global supply chains evolved during a period of unprecedented economic growth and technical development, which allowed companies to cut costs and create complex global networks. During this period, supply chains became a key element of corporate strategy, able to significantly contribute to competitive edge and profitability. At the same time that sourcing and supply chain strategies were going global, they were also being stripped out to go lean and ‘just in time’. What has become evident is that this combination of strategies has significantly increased supply chain risk. The adoption of lean practices and supply chain globalisation are not of themselves bad, it’s just the stretching of both to achieve lower costs without a full understanding of the risks that is where problems arise.

 

When supply chains go global, organisations can lose transparency. With increasing complexity, there are more points at which the supply chain can be disrupted. Supply chain risks are constantly changing and it creates a challenge for companies to keep up to date with the ever changing risk landscape. One of the most significant and little recognised risks in recent years has been resource volatility, which in fact it is one of the most fundamental. In 2008, the price of oil hit $147 a barrel before collapsing to less than $40 in January 2009. Since then the price has climbed steadily, albeit with a number of fluctuations, to around $110. Volatility in every key resource is increasing, making supply chain cost and continuity less predictable. Many supply chain management processes do not provide enough transparency to identify and predict future risks.

 

Many supply chain disruptions are by definition, unpredictable but that does not mean they are impossible to prepare for. For example, many businesses were caught out by the volcanic eruption in Iceland, which created an ash cloud in 2010. However, logistics giant DHL, a company that could have been affected more than most, actually minimised the impact by quickly switching to ground transport. This was the result of a business contingency plan that, while not specifically predicting a volcanic eruption, did predict the possible
closure of western European airspace.

 

Organisations are increasingly reassessing the sourcing strategies in the light of changes to the global economy. Many organisations that moved their suppliers offshore to cut costs are now thinking again, partly because costs in markets such as China have risen. In some industries, costs are now lower in Romania than in China. However, there is also a view that it might be better to have suppliers closer to home to mitigate supply chain vulnerability.

 

The development of strategies which simultaneously make supply chains more complex and vulnerable, would indicate that businesses are not very good at assessing how one risk affects another. Effective supply chain risk assessment does require an ability to look holistically at risk and understand relevant linkages. For example, climate change increases water shortage risk, which in turn reduces agricultural output and pushes up food prices. This is likely to exacerbate poverty, leading to an increased risk of political unrest. This chain of
events, combined with more widespread political unrest in North Africa, was a contributing factor to the events in Egypt in 2011.

 

Increasingly, companies are responsible and held accountable for ethical and sustainability issues. As consumers increasingly demand sustainable products and behaviour from business, this focus trickles down to their suppliers. Key to addressing this challenge, is to create a supply chain community where your values are embedded in your supply chain network and not just at the first tier. However, simply demanding action from suppliers to ensure they are compliant with standards, to reduce consumption of energy, water or raw materials, or to meet standards on labour rights, is not necessarily the right approach.
Certainly oversight has its place, but so too does help and support.

 

Sustainability issues are driving many of the innovations that are currently happening in supply chain management. This includes increased collaboration between suppliers and, in some cases, competitors. Carlsberg and Heineken share logistics in the UK, while oil companies have had shared trucks for petrol deliveries for some time. Because the cost of moving things will continue to rise, we are likely to see a change in globalisation strategies, resulting in more local production or alternatively new ways of transporting things. For example, it’s possible to half the CO2 impact of some products reaching our supermarket shelves by shipping in bulk and then packaging locally.

 

Political risk has assumed new prominence in recent years as a result of events in North Africa and the Middle East. However, business has little choice but to be involved in countries that are susceptible to unrest either to obtain goods and services or to capture new markets. Most analysts predict the economies of the BRIC countries (Brazil, Russia, India and China) and other emerging markets such as Nigeria, Indonesia, South Korea and Turkey, will be showing the strongest growth over the next ten years. These are also the countries that have some of the biggest geopolitical risks*. Egypt is a good example, which up until 2012 was one of the fastest growing economies, thought to be fundamental to accessing wider Middle East markets.

 

Although growth economies are ripe for investment and development due to fast and hopefully sustained economic growth, they are also more likely to be exposed to ‘global risks’ and lack the structural resilience to face these risks. It is therefore imperative for companies operating in these countries to identify and monitor the inherent risks that go hand in hand with the opportunities these countries offer. 

 

It’s quite possible that the benefits of globalisation in terms of supply chain might have reached their limits, and we might see at least some return to more local production and supply. However, this won’t happen overnight and in the meantime, the true nature and vulnerability of supply chains need to be understood and effectively managed. This can only be achieved by addressing risk seriously throughout the procurement lifecycle and looking at risk holistically. Risk management must be seen as a strategic activity and achieve the correct balance between setting standards, oversight, and supplier development and support.

 

SRM provides a vehicle for a more collaborative and transparent approach to supply chain risk management. Visibility of risk does not equate to ownership, so clear accountabilities and expectations for each member of the supply chain community need to be established. Good risk management practices should not be the preserve of only strategic supplier relationships - these also need to be embedded in minimum standards of supplier contract and performance management.