Where does danger reside in modern supply chains? Are new risks going unnoticed? Nick Allen looks at the latest techniques used to identify and mitigate risk within the chain.
Perhaps the greatest challenge for anyone charged with mitigating supply chain risk is in identifying and evaluating the potential sources of risk in the first place. Exacerbating the problem is the global nature of modern business, meaning the opportunity for disruption and damage to reputation has increased as a direct result of longer supply lines, greater complexity and distant, often unfamiliar, suppliers.
To understand the landscape of potential risk it is first necessary to know who your suppliers are, right through the multiple tiers of a supply chain – and that includes accumulating data on each supplier at every site that contributes to the end product. However, few have a good understanding of their tier two suppliers and even fewer have any idea who are involved at tiers three, four and beyond. According to research from supplier information company Achilles, some 61 per cent of organisations that procure outside the UK do not feel their supply chain helps them to identify and mitigate risk and a quarter of UK companies said they are not confident in their database of overseas suppliers.
A proactive approach to risk assessment and mitigation is now critical, in terms of: business continuity, profit protection, corporate reputation, customer retention, legal compliance, ensuring sustainability and maintaining shareholder value. But for many organisations supply chain risk only receives intermittent or scant attention and is not approached in a proactive manner, as a planned process.
Clive Geldard, group vice president for retail and supply chain at Solving Efeso, believes two key events have been instrumental in re-focusing corporate attention on supply chain risk – the Japan earthquake of 2011 and the horsemeat scandal earlier this year.
“The Fukushima event was a big wake up call for a lot of companies in the technology, aerospace and automotive sectors,” he says. “They were sourcing from multi-tier supply chains and didn’t necessarily realise they had upstream suppliers that were going to be impacted by the disaster.”
Geldard highlights the problems BMW had following the 2011 tsunami. “Because of the way the company manages inventory in its tier one and two suppliers, when Fukushima happened it wasn’t immediately aware that its tier four and five suppliers were affected.”
When the company realised the extent of the problem it had to take a crisis approach to managing the situation.
However, Geldard points out that, as a result, BMW has moved from a ‘reactive’ to a ‘proactive’ approach to managing supply chain risk. “It has now set up a central control tower where it is using public domain based information to proactively assess risk in its supply chain. For example, it has now mapped much more effectively its tier four and five supply structures using Google Earth mapping of the supply base.
Then against that it has been able to look at political unrest, weather projections, and any kind of seismic activity [in the proximity of each supplier],” he says. So the company is able to assess and see at a glance the many risk factors that could disrupt the territory in which each supplier is located.
Geldard sees this as an interesting example of using quite openly available technologies to offset risk. “If you integrate these sources of information into a business process and you consolidate them in a control tower where you can assimilate [that information], you are then in a position where you can either start to anticipate or scenario plan around certain ‘what if’ actions,” he says. “So you move much more into proactive risk management.
“You then need to be able to disseminate this information within your organisation to the relevant buyers or category managers so that they can use the information. It might not sound much but if you have one or two days anticipation of a potential risk or event, there is actually quite a lot you can do. You can, maybe, change supply routes or validate with a supplier what contingency plans they would have in place,” says Geldard.
Still a lot to do
Given the wide availability and easy access to this kind of information, are companies now taking a more proactive approach to managing supply chain risk? “There is still a lot to do,” he says.
“You will have these events that bring supply chain risk management back into the consciousness, but it still doesn’t seem to be something that is yet fully ‘business as usual’. My feeling is that a lot of businesses still have these slightly static, procedural business continuity plans that are not necessarily relevant to some of the trends and future risks that we might face.”
So what are some of these unforeseen risks?
He explains how political decisions can have a swift and significant impact on supply chains, citing the example of the Saudi government’s desire to increase the number of Saudi nationals working in domestic businesses.
In a country where expatriate workers were commonly employed to perform essential tasks within the supply chain, the imposed constraints on the use of expatriate labour created a significant issue for many businesses around recruiting and securing enough people to run logistics tasks.
Another significant risk is the threat of cyber outages on supply chains. Insurance broker and risk management firm Marsh, recently warned that such threats have affected more than half (52 per cent) of companies surveyed for the Business Continuity Institute’s ‘Supply chain resilience 2012 report’. But perhaps even more worrying is the threat of a new cyber espionage campaign, highlighted by researchers at Kaspersky Lab, where supply chains in Japan and South Korea have been targeted.
However, IT provides the means to facilitating visibility and mitigating risk. Claire Umney, general manager at AEB International says: “Managing supply chain risks means identifying them in the first place and employing best-in-class visibility tools with bespoke KPIs and event management, reporting exceptions back to third and fourth tier suppliers.
“Complex supply chains often involve multiple levels of suppliers and logistics providers,” she says. “As such, it is important that companies have processes in place to ensure visibility throughout their entire supply chain – including auditing quality, quantity and financials.”
Over the past few years a major risk to buying organisations has been the solvency of suppliers, but is this still an issue? Geldard believes we are now in the post-bankruptcy phase. “But what I do see as the challenge is that many markets are facing constraints in their supply market,” he says. “There has been a contraction of suppliers, a reduction in available capacity, and therefore if you are sourcing for a major company you sometimes now find your supply options are constrained. And this feeds through into companies needing to have more integrated supplier management arrangements.”
However, supply chain risk takes many varied forms and a growing risk for those importing goods comes from new legislation, particularly around sustainability.
David Kennan, product strategy and marketing director, at Helveta, a company that develops software for tracking assets in the supply chain, believes digital passports present an essential way of mitigating risk for buying organisations, especially those importing goods requiring compliance with EU legislation.
The company has developed a platform that allows you to track assets through the supply chain from point of origin to point of consumption and is particularly active in the timber, bio-fuels and mining sectors.
Kennan explains that The European Union Timber Regulation, which came into effect on 3rd March 2013, requires importers of timber to provide proof of compliance to the new legislation – aimed at preventing illegally harvested wood entering the EU market. This means importers need proof from suppliers that their products comply.
“We have developed a piece of software that enables you to identify the location from which an asset is being sourced and at each control point along the supply chain we collect data about the asset, such as permits to harvest etc. So we build up a digital passport for the goods,” he says. “The exporter will say to the importer, ‘here’s a digital passport and this will provide a chain of custody history and all the events that have taken place to the asset from its point of origin’.”
In recent years the call for greater transparency in the supply chain has been strengthening, along with the desire to off-set risk, but he sees compliance to legislation as the driving force behind digital passports.
“The primary two sectors are timber and bio-fuels and this is due to the teeth of the legislation that exists,” he says. “Bio-fuels are required under the EU Renewable Energy Directive to provide a chain of custody history for any feedstock that is being used to blend bio-fuel sold in the EU and if you [governments]want it to count towards the obligation that member states have towards the targets for using bio-fuel in the transport sector then they need this data.”
Kennan also cites the Dodd Frank legislation and the role digital passports can play in ensuring imported goods to the US are free from ‘conflict minerals’.
However, could this technology be used to improve the integrity of the food supply chain? Kennan believes it could. Referring to the 2011 E. coli outbreak where Spanish cucumbers were initially thought to be the source of the deadly outbreak, he says: “[using digital passports]you would be able to identify much faster than the week it took that it was from bean sprouts from Germany.”
However, with regards to the horsemeat scandal, he says: “An IT system could never stop somebody chucking in a couple of pounds of horsemeat with some beef. But, what it does do – and this is from some work we have done in Africa – once people realise that this data is being stored in a centralised database, it increases individual responsibility, with the result that people are more aware of what their role is in the supply chain.”