Supply chains: Focus on fixing the weakest links

More than 18 months after catastrophic earthquakes hit Japan and New Zealand, both countries have a long way to go to recover from the loss of life and repair the damage.

Yet as well as the casualties – almost 20,000 people died as a result of the Japanese earthquake and the tsunami that followed – and huge structural damage, another lasting effect was the damage caused to businesses’ supply chains.

Japanese companies were hit hard by the devastation of March 2011, but the effects of the disaster extended across the world to customers far removed from the scene.

Organisations with headquarters in 18 countries, across 12 different industry sectors, were affected by the two earthquakes, according to figures from the Business Continuity Institute, the UK-based industry group.

Its annual supply chain resilience report reveals the extent to which natural disasters – as well as other unexpected events – can compromise supply chain security.

Mid-sized companies, which lack the clout and resources of their larger, multinational counterparts, are often hit particularly hard.

“Over the four years that we have been doing the supply chain resilience report, we have seen very high levels of disruption to companies,” says Lee Glendon, the BCI’s head of research and advocacy. “Last year, the flooding in Japan and Thailand really brought that into the public eye.”

In the wake of the disasters in Japan and New Zealand, the BCI interviewed organisations whose supply chains were disrupted. Twenty-nine per cent of the companies interviewed by the BCI said their key supply chains had recovered from the earthquakes within a week, but 24 per cent took a month and 41 per cent needed between one and six months to get back to normal.

In fact, 92 per cent of organisations said they had reviewed their supply chains as a result of the earthquakes, with 70 per cent reporting they would be making some changes to reflect the lessons learned.

Aside from disasters, Mr Glendon says, the main supply chain threats that businesses identify are adverse weather and unplanned breakdowns in information technology or telecommunications systems.

“It does vary by sector, though,” he says. “In the financial services sector cyberattacks will be in the top three, whereas among manufacturing companies it will be product quality incidents and transport threats.”

Indeed, the BCI’s 2011 supply chain resilience report revealed that 85 per cent of the 559 survey respondents had experienced at least one disruption in the past year, and adverse weather was the main culprit, cited by 51 per cent. Other common problems included failure in service provision by an outsourcer, loss of talent or skills, insolvency and civil unrest.

Supply chain incidents led to a loss of productivity for almost half of businesses, according to the BCI, which publishes its 2012 report next month.

Between 50 and 60 per cent of UK businesses have continuity plans in place to cope with unexpected problems, says Mr Glendon, although that falls off a bit among smaller businesses”.

He adds: “But larger companies usually have a strategy, and some sectors, such as financial services, are required to have plans in place.”

David Noble, chief executive of the Chartered Institute of Purchasing & Supply (CIPS), says supply chain security is becoming an increasingly high-profile issue among businesses. “There is no question that it is right at the top of company agendas, and supply chain professionals are being questioned hard about how to mitigate risk,” he says. And he emphasises: “The risk is not only [financial] loss but also brand risk.”

However, while mid-sized and large companies may have a business continuity strategy in place, the challenge is to ensure suppliers do the same – or that there is an alternative if the usual supplier fails.

“Often it is some way down the supply chain that the problems occur,” says Mr Noble.

“With Chinese suppliers, for example, there can often be subcontracting and sub-subcontracting, until the company at the top of the chain might not be certain where it ends. That is where they can be caught out when something happens.”

Mr Glendon says: “With traditional supply chain models, you tend to look at what suppliers you have – which ones you spend the most money with and which are very niche and difficult to replace. A lot of traditional disruption is around spending and it is about probability.”

He says current business continuity thinking emphasises time. “The suppliers you need to think about are the ones that would take a long time to replace. Rather than looking at the probability of something going wrong, you should concentrate on the suppliers that would really affect your business, based on the time it would take to replace them.”

Mr Glendon also highlights the need to look at supply chain problems caused not only by unexpected or calamitous events such as natural disasters or wars, but also by issues such as loss of staff or talent – often a particular worry for companies that use remote outsourcing.

“If you are using a supplier in India, for instance, what happens if key people are poached – will that supplier be able to cope?” he says. “You need to understand how your partners would behave.

“If they were affected, would you be at the back of the queue when they recover? You might, for example, decide that some aspects of your supply chain are so critical that you need to bring them closer to home.”

Businesses can also use financial products such as insurance to manage their supply chain risk. “Insurance companies are also getting involved [in supply chain security], particularly for mid-sized companies,” Mr Noble points out. “Shareholders recognise that the supply chain is an expensive part of the business and the need to insure against problems.”

Mike Spicer, senior policy adviser at the British Chambers of Commerce, says: “If you are managing transactions across borders, there are all sorts of risks, never mind natural disasters; there are always dangers that sit outside that. If you are not in a position to monitor what your supplier is doing, you have to think about how you can manage that through financial products.”

There was a sharp contraction in trade insurance products in the UK as the downturn began in 2008, he says.

But efforts by the government have helped to extend the number of financial products available, and a growing number of businesses are becoming aware of them.

Mr Noble at the CIPS believes a significant challenge in supply chain security is to ensure there is enough training and expertise among supply chain professionals. Through its certification process, the CIPS promotes formal evaluation of supply chains and recognised qualifications for purchasing and supply professionals.

“It has never made any sense to me that accountants have to be certificated but purchasing and supply chain professionals do not,” he says.

“A rogue buyer can ruin a contract and do just as much damage as a poor accountant.”

The BCI’s training courses and business continuity management process are also being adopted by a growing number of companies.

Mr Glendon says: “Securing the supply chain means the whole concept of business continuity needs to be embedded throughout the organisation.”