LOGISTICS & TRANSPORT

Logistics & Transport Focus

February 2013 w

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Volume 15Number 2

February 2013

focus

www.ciltuk.org.uk

Supply chain horrorsPreparing for ‘black swan’ events – see page 48

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The far-reaching consequences of supply chaindisruption, supplier failure and damage caused to a brandthrough supplier malpractice are all too readily visible ashorror stories in the press: incidents that underminemarket confidence and directly impact corporateprofitability and shareholder value.The potential for suchhorrors to strike has increased dramatically in recentyears with the emergence of highly complex and greatlyextended supply chains. Lines of supply for all manner ofgoods and components traverse the globe within tight

timeframes and with minimal inventory as backup.Just-in-time processes keep supply chains lean, but suchdistances make them extremely vulnerable to disruption.

A significant number of high-impact, low-probabilityblack swan events hit supply chains in 2011, with theNew Zealand earthquake, the Japanese tsunami andfloods in Thailand.The Japanese tsunami in March was atrue horror story, causing huge disruption to automotiveand technology supply chains. Parts shortages from theJapan earthquake impacted car production worldwide,

Supply chain horror stories are becoming a common occurrence,

with black swan events taking their toll on global lines of

supply. But there is a much wider spectrum of potential

disasters that could turn your blood cold and send investors

running for safety.

Take care to avoid thehorrors in the chain

OPINION

SUPPLY CHAIN

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AUTHORDan Quinn

The automobile supply chainwas hugely impacted by theJapan earthquake and tsunami.Brand-new Toyotas are seendestroyed at Sendai Port.

Dan Quinn, New SectorDevelopment Director, Achilles

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hitting Toyota, Nissan and Honda, in particular, costingmany hundreds of millions of dollars in lost productionfor the sector. Floods in Thailand in the autumn causedfurther chaos when clusters of specialist hard disc drivemanufacturers were inundated, removing a third ofglobal production capacity for a highly sought-aftercomponent for notebooks.

Corporations are becoming acutely aware of theimpact such supply chain issues have on the financialperformance of the business. Reflecting this, findings fromresearch conducted by Achilles and IFF Research:Attitudes to supplier pre-qualification, indicates that chiefprocurement officers (CPOs) regard a supplier’s abilityto deliver in terms of quality, timeliness and cost as theirmost important risk to manage. Some 75% put it in theirtop three risks.

But are events of this nature really so unlikely? Everyyear natural catastrophes occur. Should we not beplanning and mapping out our critical supply chains withregards their exposure to risk, natural or otherwise? Howaware are we of the full spectrum of issues, particularlyfrom our suppliers, that present significant risk to oursupply chains and company share value? What is clearlyneeded is a more holistic view of supply chain risk.

Tsunamis may present dramatic images of supplychain failure; but supply chain risk, with all its potentialhorrors, comes in a multitude of forms, ranging fromphysical disruption due to natural disasters, transportfailure or civil unrest to the financial impact of a suppliergoing out of business or damage to reputation from asupplier using child labour or failing to comply withhealth and safety standards. Then, of course, there arerisks surrounding exposure to fraud, litigation andcorporate social responsibility issues. All these risks holdthe potential to impact share value, and frequently do.

The Achilles research reveals that 43% of businessesare aware of a high-risk supplier failing to meet compliancerequirements. In addition, 8% of organisations interviewedbelieve that more than half of their suppliers are highrisk, which is defined as suppliers whose: ‘financial failure,failure to deliver or failure to comply with relevantlegislation or regulation would cause significant financialcost and/or reputational damage’ to the buyer.

Interviews conducted as part of the research offersome interesting insights:

� ‘A supplier was fraudulently identifying parts.They wentto jail as a result. Our company had to reaccredit oursuppliers.’Transport, storage and communicationssector

� ‘We’ve had companies that have had a guy killed onthe site.We stopped dealing with them.’ Manufacturingsector

� ‘The use of substandard labour by [supplier] causeddamage to our brand reputation.’ Transport, storageand communications sector

� ‘We use subcontractors a lot in the constructionindustry – and our supply chain is international. In thelast two years it feels as if we’re just one small stepaway from bankruptcy.’ Construction sector, morethan 250 employees

� ‘Because we are a water company, quality is an issue.We could be sued if something goes wrong and thenthere is the problem of bad publicity.’ Utilities, miningand quarrying sector

According to Nick Wildgoose, Global Supply ChainProposition Manager, Zurich: ‘Research we did with theBusiness Continuity Institute found 85% of companieshad suffered some kind of significant disruption in 2011.That wasn’t perhaps so surprising; but for the first time,

The term ‘black swan’ eventwas introduced by NassimNicholas Taleb in his 2004 bookFooled By Randomness. It is anevent with the following threeattributes. First, it is an outlier,as it lies outside the realm ofregular expectations, becausenothing in the past canconvincingly point to itspossibility. Second, it carries anextreme 'impact'. Third, in spiteof its outlier status, humannature makes us concoctexplanations for its occurrenceafter the fact, making itexplainable and predictable.

This distribution centre was hitby a freak flood

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we looked at where this disruption was occurring and40% of the disruptions were below tier one.The focus ofthose few companies taking the lead in this area is on tierone. Very few of them are tracking back through thetiers, even for their most important components or theirmost profitable products.’

He poses two highly pertinent questions:

� What are your tier one suppliers doing about theirown supply chain resilience?

� How are you checking that?

There are plenty of examples of companies whosereputation and brands have been badly damaged by asupplier or subsupplier being non-compliant with abuying organisation’s corporate social responsibility(CSR) policies. In recent years, considerable exposure inthe press over the use of child labour at suppliers hasaffected major consumer and retail brands such as Nike,Primark and Gap.

Few outside of retail consider the damage that mayensue from, say, the discovery that a boiler suit used by amajor oil company was produced using child labour, orthat a hose component sourced by an engineeringcompany was manufactured under appalling workingconditions. No company can divorce itself from theerrant policies and practices of its suppliers. As those inthe retail sector have determined, ethical auditing ofsuppliers is a necessary process for reducing exposure tothis potentially highly damaging source of risk. It isimportant that other sectors, too, recognise theimportance of monitoring suppliers in this way.

However, results of the Achilles research indicate that62% of buyers seem to be relatively unconcerned aboutthe risks suppliers present to the reputation of theirbusiness, with only 38% ranking it in their top three mostimportant risks to manage. Larger companies are morein tune with exposure to CSR issues, with 23% oforganisations with turnover between £250 and £999million, putting their most important risk faced asmanaging their brand and reputation, while smallercompanies are more focused on financial risks.

Financial failure of a supplier has been a particular riskto the supply chain in recent years. Nick Wildgoose

suggests: ‘The horrors in the chain can come frominsolvency as much as physical damage, particularly whenyou go down the chain. Often companies are unaware ofan important component coming from an SME at alower tier. It could be that the SME has a financialproblem and is in danger of collapse. So buyers needgreater visibility of lower tiers and what’s happening onthose levels.’

The Achilles report confirms buyer anxiety regardingsupplier finances, finding that the second mostconcerning risk for buyers is that of a supplier going outof business. Nearly half (48%) of companies surveyed byAchilles were concerned about the financial failure ofsuppliers’ businesses and put it in the top three risks theyhave to manage. Although credit availability may be alittle better than it was a year or two ago, the financialsecurity of many suppliers remains an open question.

The horrors of a supplier going under weregraphically demonstrated by the impact Woolworth’scollapse had on music and DVD retailer Zavvi, whenfulfilment of Zavvi orders halted as a result of itsoutsourced service provider, Entertainment UK (anoffshoot of Woolworth’s) being hit by its parentcompany’s woes.

Buyers face a continuing risk of a supplier going under,maintaining the prospect of interruptions or failure in thesupply of critical components and services. If a supplier isvulnerable it is worth knowing about it in advance.Thatway an alternative supplier may be sought, or, if thesupplier is a single source for a vital component orservice, action may be considered to help that supplier.Either way, predictive financial tools and up-to-date creditratings on suppliers is the only way of reducing exposureto this very real risk.

Nick Wildgoose advocates mapping out the criticalsupply chains to understand where the key productionsites are and the critical raw material sources, so that youcan more readily see your exposure to such risks asnatural disasters or areas of potential civil unrest. But healso emphasises the importance of checking less obviousrisks, such as those relating to intellectual property. Hesays there are many instances of companies neglecting tocarry out simple checks on whether a supplier has beeninvolved in any issues surrounding intellectual propertyinfringement. A simple, inexpensive check could savemany millions of dollars.

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In recent years, considerableexposure in the press over the

use of child labour at suppliershas affected major consumer

and retail brands

OPINION

SUPPLY CHAIN

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ABOUT THE AUTHOR

Dan Quinn is New Sector Development Director,Achilles.The company identifies, qualifies, monitors andevaluates suppliers on behalf of major organisations worldwide, and builds and supports buyer-suppliercommunities in many industry sectors to create global networks.Website: www.achilles.com

FURTHER INFORMATION

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Health and safety is another area where horror storiesabound. Risk from suppliers failing to be compliant onhealth and safety issues can have a hugely damaging impacton a buying organisation’s reputation – and that is apartfrom the great disruption, high costs and potential forlitigation that can result from a supplier’s actions, or lackof actions, at whatever tier. If a fatality occurs on thebuyer’s site, it is going to be the reputation of the buyerthat suffers. Ensuring that a high-risk supplier’smanagement processes relating to health and safety arerobust is critical to offsetting this potentially, highlydamaging risk.

Mitigating the risks presented by suppliers isdependent on having accurate supplier data. However,most CPOs are unaware of the poor state of theirdatabases and are consequently at great risk. Achilles has worked with hundreds of companies across theglobe. Almost always the senior managers of theprocurement department have been shocked at thepoor quality of their own data, when they had believedit was significantly better than it really was. Gaining aclear view of your supplier base, with access to pertinentinformation that has been qualified, evaluated andmonitored is absolutely essential to avoiding the horrorsthat can, and regularly do, strike the supply chain.

The damage to the Fukishimanuclear plant had unexpectedrepercussions on supply chains.A particular pigment used inthe manufacturer of black paintfor many automobile makerswas only produced in thisregion; as a result even Fordcould not supply a black car for a while.

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