Risky Business - Why Modern Supply Chains are Increasingly Vulnerable

Supply chain risk has found itself at the top of many boardroom agendas in the past year as a series of natural disasters, terrorist plots and other events have alerted Chief Executives to the vulnerability of many parts of their businesses. However, it would be inaccurate to say that risk has actually increased in the past decade; rather it is the supply chains themselves which have changed not least due to manufacturers and retailers dramatically reducing the amount of inventory which they hold in their supply chains. Although this makes good commercial sense in one way, it means there is less margin of error. If you are expecting a delivery on a ‘just in time’ basis and it doesn’t arrive, then your production line is more likely to go down or there could be a stock out on your shelves.

Recent disasters have meant that many companies are now starting to feel the cost in the threat of disruption. No longer is it a straight trade-off between inventory costs on one side and transport and labour costs on the other. Supply chain managers realise that they have to try and identify the costs to the overall organisation if their operations are disrupted. However, it’s a difficult job planning in financial terms for something that may never happen – and far more difficult to get the Board to spend money on a hypothetical scenario. But companies which were hit hard by the Thai floods or the Japanese tsunami now understand that business as usual is no longer a viable strategy. They have to be ready for the next major event, whether that’s a natural or manmade disaster.

Of course, it’s not necessarily about preparing a supply chain for a known threat. A successful risk mitigation strategy is about making a supply chain resilient against all risks – what is known as risk-agnostic. This requires a great deal of scenario planning; putting processes in place, implementing the technology to sense and respond to events as they happen. It has to go to the very core of a company’s supply chain strategy. In fact supply chain visibility is fundamental to an agile response.

One well documented example of what can go wrong related to the aftermath of the Japanese tsunami, when the operations of a manufacturer of a specific black pigment was affected. There was only one supplier of this pigment and hence production of a number of makes and models of its customers’ cars in Europe and the US was disrupted. If the vehicle manufacturers had had a better view of their suppliers below the Tier 1 then they could have taken steps to diversify supply and mitigate the risk. High tech companies such as Cisco have now become much more proficient at identifying components which may be at risk from disruption, and implementing a multi-source strategy.

Another reason why supply chain risk has become a pressing issue is the environment of increasingly inter-related networks in which we work. There is still very little understanding of how they interact. This is a real worry, not just for transport networks, as IT, communications, financial, energy and even society is affected. One example of this relates to the bombing a few years ago on the London Underground and Buses. Many commuters in the affected area immediately switched on their mobile phones and made calls. This had the effect of overloading communications networks; likewise websites crashed as people tried to find out what was going on. As commuters tried to get out of London, rail stations were overloaded, bus services couldn’t cope and the chaos spread out onto the M25 which became grid-locked. Hence, a very localised event at two points in London brought down the region’s transportation.

Of course, risk is not all about large-scale catastrophes. Although these are the ones which get the headlines, supply chain managers have to worry about low-level risk every day of their working lives. This can include dealing with cargo crime, corruption and strikes. However, the principle is the same. If supply chains are lean, then any sort of disruption can have far-reaching consequences to production or customer service.

One further reason why risk has increased in relevance to the global economy is that modern supply chains now reach deep into many emerging markets where standards of social and environmental practices are much lower than in the developed world. Multinational enterprises are starting to realise that there is a huge reputational risk to their companies if they are not seen to be treating their employees, or more often their suppliers’ employees in a fair and equitable fashion. Likewise, they understand that their suppliers must behave in a sustainable way to the environment, otherwise the implications of bad press will rebound on their brand. Consequently we mustn’t just think of supply chain risk in terms of the disruption to the flow of products; there are much wider issues and costs at stake.

You can learn more about this critical topic in John Manners-Bell’s book  Supply Chain Risk Management.