Are supply chains changing shape? The landscape of risk affecting decisions on sourcing and procurement is shifting, making access to supplier information all the more important. By Nick Allen.
Fuelled by unrest in Libya, the price of oil has once again breached the emotive price point of $100 a barrel. This recent spike in the cost of the global economy’s key energy resource illustrates the high volatility experienced across many of the commodity markets. Rising costs and uncertainty are adding to the risks that influence the dynamics of the supply chain, shaping decisions on sourcing policy and causing many to rethink their positions regarding their reliance on lengthy lines of supply from distant locations.
Evidence that companies are sourcing nearer to home can be seen in the automotive sector with the recent announcement by Jaguar Land Rover to invest £2bn in contracts with UK suppliers for the new Range Rover Evoque – expanding the UK supply chain by more than 25 per cent.
Vince Cable, UK business secretary, is quoted as saying that it was part of a trend by British-based carmakers to bring contracts back from continental Europe and East Asia. It has also been reported that General Motors has shifted £138 million of annual spending for the next six years back to the UK.
The cheap pound may have a part to play in this perceived shift in sourcing decision making, but other factors are likely to have had a stronger influence. According to a study just released by the Automotive Council UK: “Growing the automotive supply chain – the road forward”, survey results indicate that UK suppliers are losing out on a unit cost basis, while – paradoxically – proximity was rated as the most important competitive factor. Hence a key opportunity arises to help suppliers conceptually to make their business case on a “total supply chain cost” basis, rather than on a unit cost basis alone. Perhaps OEMs are starting to look at total supply chain costs more closely and are calculating in the benefits of sourcing more locally.
Supply chain responsiveness, reduced lead-times and lower inventory requirements are strong points in favour of shorter lines of supply. Distant sourcing would seem an uncomfortable bed-fellow of the just-in-time supply chains favoured by the automotive sector. Volatile fuel prices, greater transport costs, and higher corporate awareness of carbon consumption may also be playing a larger part in determining sourcing policy. The volatility of commodity prices, exchange rates and oil, in particular, makes supply chain planning far more unpredictable and susceptible to higher levels of risk.
Martin Christopher, emeritus professor of marketing and logistics at Cranfield School of Management, has been looking at the influence of volatility on the supply chain, having created a “Volatility index” which looks back over the last thirty years of commodity price and exchange rate movements. He notes that the index was fairly stable until 2008, when the recession hit causing high volatility that is still present today. “Under these conditions you have no idea what is going to happen to the price of a barrel of crude oil, or input costs, and this is leading us to question the conventional wisdom of forecasting and planning. In a period of volatility these tools do not work as well and this requires us to become much more demand driven,” he says.
Agility and adaptability will be key attributes. Christopher believes that the successful companies in the future will be those that are able to access capacity quickly, and not necessarily their own capacity. “It maybe that owning our own assets or making our own arrangements does not make a lot of sense. Using other people’s assets gives significantly more flexibility,” he says.
In this volatile environment expectations are that supply will move closer to demand – local manufacture for local consumption. “The cost of making things [discounting materials]is as low as it has ever been,” says Christopher. “We used to rely on economies of scale, but we no longer need to. There are new flexible manufacturing systems that allow us to make things in much smaller quantities and still derive the same benefit in terms of cost. So you can see a situation where, rather than sourcing globally for global markets, we are going to be going back to how it used to be done, manufacturing locally.”
As the global economy continues to recover, increasing demand will focus corporate attention on securing supply and on relationships with key suppliers. This has become visible in industries experiencing buoyant demand due to boosts to investment in infrastructure and mining. Heavy machinery manufacturer, Caterpillar, has just launched a “procurement excellence organisation” to improve its procurement skills so that suppliers are able to keep up with the demands of the business. CPO Frank Crespo says that securing supply was a priority in this growth period, as was achieving a better understanding of the business requirements. The procurement division spends $25 billion.
However, locating the right suppliers and finding the most efficient means of communicating with them is a critical function of any procurement operation. According to Sundar Kamakshisundaram, senior solutions marketing manager at Ariba: “The future of strategic sourcing is about being connected, being efficient and being informed. All these things need to happen simultaneously,” he says. “You need to be connected to a community of sellers, as one of the big pain points of strategic sourcing is that it takes a lot of time to find the right set of sellers.”
In strategic sourcing, collaboration is the name of the game. “Organisations, big and small, need to collaborate,” he says. “Every company is somebody’s customer and somebody’s supplier, that’s how the whole supply chain works. Every organisation wants thousands of customers which means they also need to manage thousands of relationships with their trading partners, whether they are buyers or sellers. They all need to work in a very networked and collaborative community.”
Kamakshisundaram believes that the first challenge is finding the right set of suppliers, then it is having the right sort of metrics for a particular supplier, understanding the capabilities of the supplier – what can they do, what can they not do – and then, importantly, understanding what the risks are. “This translates into how we can manage risk without having to pay a huge price for it,” he says. “Risk and cost savings are at opposite ends of the spectrum. So you can have four suppliers for the same product or service but that is not going to get the most ideal contract for you.”
Supply chain risk takes many forms and the only way a buyer can mitigate the risk of a supplier going bankrupt, failing to supply, damaging a buyer’s brand or reputation, or exposing the buyer to financial or legal risks is for the buyer to have access to reliable and validated information on the supplier.
Colin Maund, chief executive of Achilles, which manages supplier information, says: “As with all categories of supplier risk the best practice approach is to collect enough information to allow the buyer to define the level of risk presented by their supplier base and to then categorise the risks to determine where the real risks to the business lie. The buyer can then focus resource on closely monitoring those suppliers of the highest risk. However, it is important to ensure that your risk assessment results in a monitoring of suppliers on a continuous basis.”
Over the past few years, the nature of supplier risk has changed significantly. Whereas buyers were once able to protect themselves from the misdeeds of errant suppliers by contract, attitudes have changed significantly and a buyer must demonstrate that they have in place processes for checking compliance.
BT has introduced a climate change standard designed to cut carbon emissions across its entire supply chain.
This follows a similar move by retail giant Tesco, which last month announced plans to cut the carbon footprint of its supply chain by 30 per cent over the next ten years.
Last year, BT spent £12 billion with thousands of suppliers so this will have a major impact in the UK and abroad. It has been holding workshops, in collaboration with the Carbon Trust, to share best practice with suppliers. Hugh Jones, managing director of Carbon Trust Advisory Services, said: “BT’s procurement guidelines go a long way to helping suppliers take ownership of the measurement and reduction of carbon emissions during their “custody” of BT products and services.”
Industry leaders look to suppluers to cut carbon footprints
The BT standard will include three minimum expectations to be undertaken by all contracted suppliers:
– The supplier must have a policy to address the challenge of climate change;
– The supplier must actively measure and report carbon, as well as other relevant green house gas emissions.
– The supplier must set challenging targets to reduce emissions and report on progress.
– Tesco has turned to consultants PE International after finding that the carbon emissions in its supply chain were some ten times bigger than the direct emissions of Tesco itself.
Its strategy is focused on product groups – Tesco is already working on milk, tinned foods and wine. The aim it to identify the “hotspots” where most of the carbon emissions occur and focus efforts on those. Following the pilot phase, the project will be rolled out to all product groups.
PE says: “Suppliers have multiple questions and may even challenge Tesco’s targets, so PE is working closely together with Tesco in finding the best approach to effectively motivate suppliers.”