Finding new ways to cut risk

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Anyone who doubts that supply chain is becoming a critical issue in many boardrooms has only to read the report published by the Confederation of British Industry at the end of last year.
In “The shape of business: the next ten years” the CBI looks at the issues affecting business – supply chain comes well up the list.
A survey for the report found that more than three quarters of companies were concerned about supply chain fragility during the recovery and 68 per cent said they would be strengthening the level of partnerships with suppliers in the coming years. One in three said they would be increasing their number of suppliers, and around one in five said they would be offering finance to key suppliers.
This echoes the findings of other studies that have been published over the past couple of months. The Business Continuity Institute found that disruption to supply chains has risen by 35 per cent over the past year. Manufacturers had been particularly hard hit, it said, reporting a 58 per cent increase.
“We’re now seeing the downside of years of outsourcing, extended supply chains and focus on core competency; organisations are now much more vulnerable to supply chain disruption than in the past,” said Lyndon Bird, international and technical director of the Institute.
“While companies have banked the cost savings, this research indicates they have still to make the corresponding investment in resilience,” said Bird. The report, Supply Chain Resilience, supported by Zurich Insurance, found that three quarters of respondents experienced disruption in their supply chain in the past 12 months. The chief causes of disruption were: the economic recession, swine flu, and IT and telecom disruption.
And a study by AMR Research in the US found that the top three risks were: supplier product quality failures (31 per cent); commodity price volatility (30 per cent); and intellectual property infringement (30 per cent).
Using nearshore regions for sourcing/manufacturing has become the fastest growing mitigation strategy, with 38 per cent of respondents saying an increase in cost competitiveness was behind this shift.
However, it concluded that the most successful approach to mitigating risk came from effective supplier management according to 23 per cent of respondents. Inventory optimisation (17 per cent) and sales and operations planning tools (17 per cent) followed. Paradoxically, research among transport companies by insurance broker Marsh suggested that the recession is turning some executives into thrill seekers. Only 40 per cent of participants believed that their board had become more risk averse. A similar proportion see no change in risk appetite; and 14 per cent believe their organisation’s risk appetite has actually increased.
But while there is a clear desire to minimise risk and make supply chains more resilient, there is also pressure to continue cutting costs.
Research by Capgemini among procurement directors recently found that more than half of international companies are targeting savings of five per cent or more and nearly seven in ten participants said the current economic recession was having a significant impact on them: increasing targets, altering focus areas and shortening planning time horizons.
“For many, savings targets have doubled from those that prevailed when we last conducted the Global CPO Survey, and in some cases are a clear requirement for survival,” Capgemini said.
Striking the optimum balance between the need to cut costs and boost resilience in the supply chain is no easy matter, but getting it wrong could have disastrous results.
The CBI detected a desire among businesses for their suppliers to be close to market, making supply chains regional rather than global. And it set out four factors that would govern whether businesses relocate physical supply chains back to the UK:

supply chains for low-value goods will remain overseas
the UK will be most attractive where security of supply or carbon footprint are critical
whether the UK has the capacity: “in many cases the hollowing out of supply chains over the last 20 years means the UK is likely to miss out to countries such as Germany and Italy where key elements are still in place.”
if the biggest market is in countries such as India or China, there is little reason for production to be in the UK.
Ultimately, said the CBI report: “The next phase of outsourcing/off-shoring, with companies rationalising activity to a focused core tapping into a wide periphery of staff and other organisations, could go either way. Managed well, it should make the UK even more flexible and responsive and attract further inward investment. The alternative scenario could see significant loss of core expertise from the UK.”
Ominously, it said that in ten years time key aspects of the UK economy may ultimately fall under the control of overseas governments, and as market opportunities shift, current prominent businesses in both services and manufacturing may move substantially overseas.

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