A failure in the supply chain can stop a production line or leave store shelves empty, disappoint customers and ruin a company’s reputation. But there is plenty of creative thinking about how to respond to the challenges, says Malory Davies.
Life is a little less sweet for sugar producer Tate & Lyle after supply chain disruption cost it £40 million. The severe winter in the US was a major problem, causing operational difficulties in the US plants, while an extended shutdown at facility in Singapore also contributed.
The impact was described in the company’s first half results: “The disruption to our global supply chain persisted longer than we anticipated, caused by challenges in our plant network, low absolute levels of inventory and misalignments between customer demand and inventory availability (particularly from the emerging markets). As a result, we expect to incur additional non-recurring costs in the second quarter of around £20 million, taking the total costs for the first half to around £40 million.”
Not surprisingly , this was described as “extremely disappointing” by chief executive Javed Ahmed. “I have instigated an immediate review of our planning and supply chain processes, led by our chief financial officer, to ensure they fully reflect the needs of the business going forward.”
Of course, Tate & Lyle is just one organisation that has reported supply chain disruption in the past year. A study commissioned by risk management specialist Achilles found that large UK manufacturers lost more than £58m dealing with the fall-out from supply chain disruptions in 2013.
The total average cost of all supply chain disruptions was £105,000 per manufacturer.
The survey found that manufacturers were hit hardest in 2013 by suppliers failing to deliver the products of the required quality, which cost the industry an estimated £20.4m.
The second most costly disruption was suppliers failing to deliver products on time, which cost £17.2m. Financial failure of suppliers cost the industry £7m, while suppliers exposing firms to litigation cost the industry a further £7m.
Adrian Chamberlain, chief executive of Achilles, says: “In our experience, efforts to improve information about the supply chain work best when whole industries – such as oil and gas – work collaboratively to agree and implement standardised requirements of all suppliers in terms of business critical areas, such as health and safety to reduce the burden of administration. They can then manage the information on a global, centralised database – implementing the same high standards not only in the UK but in every country in which they operate.”
Professor Alan Braithwaite, chairman of LCP Consulting, highlights the fact that more than 90 per cent of organisations surveyed by the World Economic Forum in 2012 indicated that supply chain risk management had become a greater priority in the last five years.
“This has been driven by a number of interrelated risk drivers that have emerged and have increased the level of risk exposure for organisations,” says Braithwaite. “These include: lack of ownership: inertia and chaos: human errors: financial strength of customers enthused from a focus on efficiency rather than effectiveness: the globalisation of supply chains: the rise of the internet: focused factories and centralised distribution: and the reduction of the supplier base.”
But developing a strategy to address these issues is a real challenge. Essentially, says Mike McCreesh, vice-president supply chain Europe at Office Depot, the key is to maintain constant visibility from one end of the supply chain to the other.
“Focusing on this now as the economy grows is essential to ensure there is enough capacity in the supply chain to meet potential increases in demand. Instilling a significant degree of flexibility throughout supply chain operations is therefore crucial. Achieving this, however, comes down to the strength of supplier relationships. Those suppliers that feel engaged are more likely to go the extra mile to help deliver on time if they are working with a firm that understands the dynamics of their business.
“Furthermore, it is an obvious point but, as ever, failing to plan, means planning to fail. Trying to deal with the fallout of a last minute delay in real time with no clear strategy rarely wins the day.”
Hugh Williams, managing director, Hughenden Consulting, argues that supply chain risk can only be mitigated by investing in people but too often this only happens after a disaster occurs.
“With almost every avoidable crisis, the culprit identified in the post-mortem is ‘lack of joined up thinking’ – a systemic failure caused by people failing to collaborate effectively. Companies must invest more in educating people and designing collaborative supply chain processes. These equip people to make better decisions, taking into account how their actions impact on others and the company performance as a whole.”
Braithwaite highlights the importance of a full understanding of the end-to-end chain and all the actors that can have a significant impact on performance going down beyond tier 1 suppliers and direct customers. “Thorough due diligence of the mission critical actors and the logistics links between them is also required so that appropriate risk mitigation can be applied based on the due diligence. Finally, it is vitally important that there is systematic and real time monitoring across the chain.”
Natural disasters, such as earthquakes and flooding, have had a serious impact on supply chains. Adam O’Donoghue, materials director at Flextronics, says: “The supply chain for hard drives was impacted severely during the flooding in Thailand a couple of years ago. For us it is important to react extremely quickly to these type of issues so that we are first into the market to secure product. Key for us in this process is the strong relationships we have with alternative vendors from whom we can not only source parts but also obtain up-to-date information as well as product.
“We also maintain close relationships with a network of brokers and open market vendors that can provide us with product and live information. Our model also allows us to maintain parts chains so that we can source alternative or successor products that will support our requirements.”
Williams points out that more companies are setting up contingencies for manufacturing. “Some have managed to strike up agreements with back-up facilities willing to work on favourable terms on a moment’s notice. A large printer manufacturer I met recently claimed it could switch and re-establish manufacturing capabilities to an alternate facility in about six weeks.
“Supply chains are experimenting with some creative ideas for production in riskier environments. Diageo’s new innovation called ‘The Cube’ is a ‘plug and play’ spirits production line broken into five parts that can be shipped to Ghana or Nigeria, bolted together and be ready to go very fast. Since it’s is low cost and portable, it can be relocated relatively easy if necessary.”
Of course, extended supply chains create their own risks. “As distance grows between supply chain partners, the need to establish a framework for measuring performance becomes more important than ever,” says McCreesh. “It is therefore vital that clear KPIs are established with each supplier from the outset and that, vitally, a system is put in place to consistently check that these are being met.
“It is important for suppliers to work closely together, and this becomes even more essential as supply chains become more extended. However, complexity is the enemy and where possible supply chains should be kept simple and the number of suppliers minimised to a carefully chosen few, based on quality and expertise and not simply cost.”
Williams argues that the most valuable step companies can take is to evolve their knowledge and mindset around two things: capacity and inventory. “These are the two levers companies have to insulate themselves against risk, as my late mentor Eli Goldratt taught us. With spare capacity, companies have time to catch up if anything unexpected goes wrong. However, besides being potentially costly, spare capacity is ‘emotionally unacceptable’. People feel compelled to sweat their assets, if only to build a pointless ‘bridge on the River Kwai’.
“It’s similar with inventory. When I advise clients to optimise their inventory, it’s not a euphemism for reducing or eliminating it. The right inventory levels in the right locations serve as an insurance policy against all kinds of risks from natural disasters to a competitive promotions. And yet, most companies still err on the side of not holding enough safety stocks. You only need to walk into a supermarket to see the proof on empty shelves!
“Japan’s automotive industry, which has been beset with catastrophic events in recent years, is working hard at becoming more resilient. Companies like Toyota are planning seriously for alternative supply sources and collaborating more actively than ever with partners and competitors.”
However, says Williams, agility is also important. “In our highly complex and interconnected global economy, it’s impossible to predict every kind of disaster so these days agility has an edge on planning. However agile is easy to say – much more difficult to be. Agile organisations are highly collaborative, with people empowered to exercise judgement in a range of situations and working towards shared goals. Ironically companies don’t often make the investment in people to become truly agile until after a disaster strikes.
There’s an on-going debate over ‘lean’ versus ‘agile’. Lean doesn’t mean working towards zero inventory, it means using inventory in the right place for maximum risk protection. Inventory is never a waste if it’s actively protecting a company. If you protect yourself sufficiently by optimising capacity and inventory, you’ll be covered for a wide range of minor risks.”
The recession saw some supply chains threatened by financial instability of suppliers. While that threat seems to have receded somewhat, it is still important to be alert to possibility. O’Donoghue says: “I don’t think it’s something to be complacent about, and we continually analyse risks with vendors, but during the past couple of years things seem to have settled down. Following a period of mergers and belt-tightening the market is now geared for the present with one eye on the future expected trends.
O’Donoghue is also alive to the risks of political instability: “It’s important to monitor political risk and we use risk analysts to constantly maintain our outlook on the political landscape. This enables us to continuously develop our risk strategy to ensure we have potential alternative supply chains in place that can be initiated within short timescales to minimise disruption to our sites and customers.”
CASE STUDY: BSI launches risk standard
BSI has launched independent assessment scheme to mitigate risks in supply chain security.
ISO 28000, the international standard for supply chain security management, has been developed to help organisation to better assess security risks in their supply chain, manage new threats as they emerge and implement appropriate controls.
Wilson James is the first company be independently assessed by BSI and achieve certification to ISO 28000. In 2013, the company won the contract to secure the new London Gateway site of global port operator DP World. A key aspect of the selection of a security provider was that the appointed contractor would achieve ISO 28000 certification by the end of 2014.
Lorna Anderson, supply chain security scheme manager at BSI said: “International cargo is the life blood of our global society and essential for countries and companies to reach new markets and achieve growth. Therefore the compromise of supply chains imposes both direct and indirect impacts. These include the cost of managing security incidents, increased insurance premiums, and indirect impacts such as reputational damage and loss of trust resulting in a drain on global productivity.”
Give a chain a bad name…
Supply chain failures can seriously damage your reputation, but it is all too easy for companies to overlook this.
Professor Alan Braithwaite points to the anecdotal finding that only 60 per cent of businesses that experience a major disruption are in the same structure three years later.
“Managing supply chain vulnerability should be a priority in all boardrooms – particularly as there are significant financial implications.
“For instance, research has shown that at a company level, share prices are much more severely affected by disruptions from risk events. From those 861 companies analysed with profit warning announcements associated to supply chain difficulties, on average there was an 8.62 per cent market adjusted reduction in shareholder value and that, if a period of 60 days before and after the announcement is included, the total effect is about minus 20 per cent.
“These disruptions were classified as including: Parts Shortages: Changes by Customers: Ramp and Roll out problems: Production problems: Development problems: Quality problems. Clearly from this data, we can conclude that so-called ‘foul ups’ are not isolated problems, and they destroy shareholder value. They affect customers and suppliers alike, often with equally disastrous results.
“The management of supply chain vulnerability is a capability that is finding its moment in the development of supply chain thinking. The downside from supply chain risks is much greater than the upside from perfect supply chains. This means that companies need to be more alert to the tensions and build in resilience through formal processes of strategy and design. Tools are emerging that allow sensing and feedback to operational, tactical and strategic decision making horizons. Within a few years such approaches will be commonplace in leading corporations.”
Nevertheless, Cathy Johnson, VP at Hitachi Consulting, reckons that companies are taking reputation risk more seriously than in the past. With the growth of social media, consumers are far more aware if a retailer has a supply problem. She points out that the ripple effect is now far higher, so a company that fails to deliver can quickly have its reputation ripped to shreds.
CASE STUDY: Total recall
ExpertSOLUTIONS, the specialist in product recalls, retrievals, returns and audits, has published a recall index looking at how the extension of supply chains impacts the industry.
Farzad Henareh, managing director UK & Europe at Stericycle ExpertSOLUTIONS, says: “ “Product safety notifications are continuing to rise across Europe, impacting both businesses and consumers. The volume in Q2 2014 was 16 per cent higher than Q1 2014 and it increased ten per cent year-on-year. A lot of these product safety notifications are a direct result of instability in the supply chain.”
“Instability, and therefore risk in the supply chain is caused by a number of key reasons. Firstly, long supply chains can lead to variations in product safety standards allowing substandard products to slip through the net and potentially cause consumers harm.
“Secondly, the increase in production volumes in some areas, combined with the tract nature of regulations, especially in the food industry means that fewer sub-standard products are allowed to stay on the market and cross into other territories (border rejections).
“Finally, the dynamic nature of supply and demand for food especially around the world means that some countries have heavy demands placed on them at short notice to either produce more or manage a surplus. In both instances, this can often lead to a drop in product quality and therefore pose a risk to the consumer.”
Beyond sustainability to supply chain resilience
The risk of sudden change is growing, so it is suggested that in addition to optimising supply chains for current conditions, and to cope with traditional disruption scenarios, more thought should also be given to companies’ macro-vulnerabilities, says Arthur van Gerven, senior director business development at Menlo Logistics.
“The same sophisticated network tools used today for optimisation of supply chains can also be used to answer questions like ‘What should I do to be better placed if oil prices were to double?’ or ‘How protected am I against potential consequences from regulation of greenhouse gas emissions or a severe weather event?’ And of increasing concern, ‘How vulnerable is my supply chain to political flashpoints and tensions if they should develop into conflicts that can disrupt trade?’
He points out that having considered worst case scenarios for supply chain disruption, it should then be easier to work towards positions of resilience.
“For example, how does one plan for the effects of climate change? Addressing greenhouse gas emissions is a political, economic and environmental issue. And while the effects of increased carbon emissions are debated, governments are increasingly examining – and implementing – regulatory steps intended to reduce man-made sources. These actions are likely to increase as we experience more instances of extreme weather events, such as intense rainstorms leading to flooding, unseasonal droughts and forest fires.
“Supply chain planners should also consider more seriously how rising international tensions and competition for global energy and mineral supplies could affect operations, or sourcing of plants and raw materials. Optimizing existing and projected business flows is a very sophisticated management process, but counts for nothing if the underlying assumptions suddenly change. Consider the implications of a closure of the Suez Canal – or disruption in the Panama Canal, he says.
“The macroeconomic implications surrounding global oil supplies are also becoming more and more volatile. Even with today’s high prices, energy demand continues to rise, a trend that will not end soon, particularly as developing nations mature. China’s car market for example has been growing at an annual rate of 25 per cent for a decade. The Brazilian, Indian and Russian markets are also set for dramatic growth. The increased consumption foreshadowed by this growth is likely to send oil prices even higher,” says van Gerven.
“Out-sourcing to a 3PL service provider goes some way to managing the results of supply chain disruption whether created by a major disaster capable of paralysing a complete production process or more minor localised events such as traffic congestion or labour disputes. However, a 4PL approach, over-seeing all out-sourced logistics suppliers allows for the identification of more systematic, process-driven inefficiencies. A good 4PL is capable of designing solutions to provide more resilience within any complex supply chain.”
Originally printed in Logistics Manager 11/2014