Danger in the chain

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In a cold economic climate where manufacturers, retailers and suppliers are increasingly exposed to the dangers of financial failure, can steps be taken to ensure the integrity of the chain? Can good planning and set procedures reduce the chances of being caught out? Nick Allen

Recent trends in outsourcing the manufacture of goods to distant low-cost economies have significantly increased risk within the supply chain. Distance and longer lead-times have heightened the chances of interruptions in supply, with disruptions and congestion at ports being possible risk factors. But now as global growth slows to its lowest rate for 60 years – with the International Monetary Fund predicting growth of just 0.5 per cent for 2009 – global supply chains are set to experience unprecedented shocks to the system as buyers, suppliers and service providers battle the financial rigours of the market. Undoubtedly, some will fail.

Craig Neame, a partner at international law firm, Holman Fenwick Willan, deals with the commercial fall-out from supply chain problems. He highlights some of the repercussions from the large corporate casualties that have recently occurred on the high street. “Those companies have quite a large amount of stock both in distribution centres and in transit,” says Neame. “Questions then arise as to ownership of that stock, about the rights of the outsourced logistics service providers who manage the distribution centres and perform the carriage and handling contracts, as against the customer and also, as against the vendors of the stock that is in transit or sitting in warehouses.” Retention of title clauses can make for complex situations and may become very messy, but then this is a natural consequence of a downturn.

Apart from the failure of a supplier or buyer, Neame identifies a significant rising danger from the collapse of a freight forwarder or perhaps, a logistics service provider – the placement into administration of freight forwarder Anglo Overseas Ltd being a recent example. Such circumstances not only create headaches around finding an alternative service provider and all the ensuing technical and management issues associated with that process, but it also throws up questions over ownership of existing stock in the chain.

Neame points out: “The forwarder is likely to owe large amounts of money to shipping lines and airlines, who will in turn take steps to “lien” goods [take possession of the goods]… and forwarders, shipping lines, contract logistics providers will typically have in their standard contracts a right to lien goods. If you are a well advised manufacturer, retailer or importer, you will have negotiated that out [of the contract].”

“It could be someone providing your warehousing and distribution that goes under, and that will affect your customer fulfilment.” Neame thinks it is only a matter of time before one of the mid-sized road transport specialists falls into financial difficulties.

But the worries don’t stop here; shipping lines could also be in danger. “There’s huge amounts of capacity out there for container shipping,” he says. “Container volumes from the Far East into the US have gone down dramatically and European inbound has also reduced substantially – the freight rates have just completely blown away. There is no money in ocean freight at the moment and there are risks that companies with weaker balance sheets could go down.”

The consequences for retailers and manufacturers if a mid-sized shipping company failed could be highly damaging, “if you had a shipping line go down that had tens or hundreds of thousands of containers, the world and his uncle is going to be trying to lien goods,” says Neame.

One key area of exposure in international trading relationships is undoubtedly the financial supply chain. Phillip Kerle, managing director, Demica, believes: “The enduring corporate desire to extend payment terms from suppliers often creates an unproductive tug-of-war, threatening the supplier’s cash flow and moving them into a vulnerable position.” To ease this situation, he says: many large corporate buyers are seeking to engage their smaller suppliers in mutually advantageous financing arrangements.

“Supply Chain Finance” (SCF) programmes are now offered by most international banks, providing the corporate with a working capital management facility (effectively extending payment terms) and giving prompt payment to suppliers. Kerle believes that these collaborative financing tools will play an essential role in creating more sustainable supply chains in the increasingly globalised trading environment. He says: “SCF is generating much enthusiasm among banks and their corporate customers as a means of substituting for lower credit availability during the credit crunch.”

According to a recent report from Demica investigating attitudes and developments in the European SCF market, there is still a perception that technological difficulties hinder the success of SCF solutions. However, Kerle says this is not true, and points to the need for a greater level of education by banks and corporates so that they can confidently encourage suppliers to participate in SCF programmes. “Supply Chain Finance solutions are available today that avoid the need for major technology integration, leaving legacy systems where they lie, and allowing purchase/sales ledger flat file data to be output daily into systems which automatically input and format the data. As such, the disruption to suppliers” and buyers” processes and IT systems is minimal.”

One increasingly evident area of concern is whether or not suppliers will continue to get the credit they need? Indications are that tens of thousands of suppliers based in China are going out of business.

According to Nathan Pieri, senior vice president of marketing and product management at Management Dynamics, “Supply availability has a lot to do with getting your relationship online. One way to address this is through technology to track product in production, to see what’s going on further back in the supply chain.” He believes that if companies use technology correctly they can more easily detect early warning signs. “Using a supplier portal you can establish milestones to define alerts anywhere in the production process.” In addition to being portal-based Management Dynamics also has a workflow process that tracks goods to when they are ready to ship.

On the regulatory side, there are supply chain risks as well. Importer security filing, a changing regulation, is a good example. “If it isn’t filed correctly, your goods could get held up prior to sailing,” says Pieri. “There are some serious implications for your supply chain if you don’t comply. We automate the process – first by classifying the goods, starting with a compliant purchase order.”

Pieri sees the potential for costs to get out of hand when shipping internationally. “Companies need to gain control of their international contracts, which can be quite complex. By doing so, they can gain greater control over their logistics and transport costs. One way is the modal shift concept – by gathering all information about a shipment, companies can discover when they are air freighting unnecessarily. He believes that the best way to get a handle on costs is by using technology effectively. Supply chain risk is forcing more silos in companies to work together.

Dave Food, business development director, supply chain applications at Oracle believes that commercial relationships between supply chain partners are under strain due to increasing demands for higher levels of performance, both in terms of on-time delivery and product quality. However, he says: “You have seen a fair amount of product being sourced from China, India, Bangladesh etc because its cheap, but the amount of brand value that has been put at risk due to quality issues – lead in toy products from Mattel being a good example – means we need greater visibility.”

Food sees two distinct perspectives on supply chain risk. “You have people who are running their supply chains looking at the risk of disconnectedness, the risk of the grey market and copies, the risk of discontinuity within the supply chain at the execution level. But then there are structural issues of brand risk, financial risk, sourcing risk – here people are talking about governance risk and compliance as a process which flows into the supply chain structure itself, but tends to come more from a corporate governance point of view as opposed to sitting purely under a supply chain director.”

Protecting the brand by ensuring that consumers receive only genuine products is a key concern within the pharmaceutical sector. Drug companies are active in designing products that can be referenced throughout the supply chain. “They [pharmaceutical companies]are looking at product codes that you can check online which are referenced back to the source manufacturer to confirm that the product you are about to consume is actually a product produced by an approved supplier,” says Food.

The importance of visibility along the chain goes beyond the execution level and of knowing where a container is at any point in time. In the pharmaceutical sector risk of contamination and product decay are critical factors, so the route by which a product travels must be clearly visible – any break in, say, the cold chain can denature a temperature sensitive product. In particular, Food points out that new bio-tech products are becoming available that are configured for a patient with a specific gene type. This makes it essential that the correct product reaches the right patient.

The growing trend to sourcing products on a global level has placed a greater emphasis on smoothing the movement of goods across borders. Fast and efficient transit of vital components on a just-in-time basis is essential to many manufacturing businesses. However, the US Sarbanes-Oxley act of 2002 has placed a tremendous pressure on importers based in the United States, and those companies exporting to the world’s largest economy, to provide much greater detail on imported goods. If goods are to be processed at the ports quickly, clear visibility of cargo information – including a confirmed and approved source – is needed.

Some companies “have been looking at using rfid tags going into the US, basically off the back of Sarbanes Oxley requirements,” says Food. If all the necessary documentation “can be tagged to a particular container and bundled together for pre-clearance, the time at the port can be reduced by at least 24 hrs – and in the current climate, that is quite a lot of money for some of these fast moving high value items.”

“Wherever you are moving high value items, and they have to be moved quickly through customs, there is a risk of discontinuity. And when you think about how little “fat” supply chains have these days, if a particular container doesn’t arrive to a particular single line manufacturer, the production line stops and then everybody knows about it,” explains Food.

Every node in a supply chain potentially means risk, delays and sometimes inventory. According to Food more companies are looking at the possibility of bringing in generic product and configuring closer to the customer. He offers the example of mobile phone handsets, “rather than the handset being branded at the manufacturer, some are asking: Isn’t there another way of doing this? A solution can be to configure the handset much closer to the consumer and therefore give them much more flexibility, and so minimise risk.”

“When people now do their supply chain models, they are not only looking at length of the chain and inventory but cost, carbon usage and risk. That makes for a complex model which can make it difficult to implement as often large chunks of the supply chain have been outsourced to third party logistics companies, contract manufacturers and third party postponement companies,” says Food.

Right now many people are stepping back and saying, what are our core products? Which are our core suppliers? Where are the key risks? But importantly, what is the contingency plan should this plant burn down or this supplier go out of business? These are all highly pertinent questions that need to be answered.



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