SUPPLY CHAIN RISK MANAGEMENT BLOG

'Stepchild' Supply Chain Risk Management?

May 25, 2014    Eberhard Raue

 


It is often said that “supply chain risk management is a vital topic”. Why is it then that even after the most recent incidents in the last few years, such as the Tsunami in Japan, the Arab Spring in North Africa or intensified regulatory interventions like the Frank-Dodd Act, companies are still focusing only on the creditworthiness of their direct suppliers? Creating transparency in the entire supply chain, monitoring risks related to suppliers and subcontractors, taking into account locations, logistical hubs or countries … far from it!

It seems to be a similar case as with private insurance cover – only when something happens, it would have been good to have had this covered…

Examples from the past are significant here. Because of the Icelandic ash cloud, BMW was forced to stop production due to missing components, for example. This temporary halt in production resulted in delayed manufacture of around 7000 vehicles. LSI, a leading manufacturer of hard disks experienced a 10% loss of business during the flood disaster in Thailand. Long before this, a strike in 2002 by dock workers belonging to the International Longshore and Warehouse Union paralyzed all 29 ports on the U.S. West Coast, which cost the U.S. economy an estimate of $1 billion per day in the first week and $2 billion in the second week.

Source: IHS iSupply Research Q3 2012 vs Q4 2011

But there are not only examples from the past: the most recent incident at General Motors went all around the world – triggered by a recall of 6.3 million vehicles due to faulty ignition locks and power steering.  Result: officially 13 deceased. In fact, the overall number of recalls in the automobile industry is rising in general; not surprising when considering the high external percentage of added value and the complex links between modules and components. The economic logic of this development is irrefutable, the consequences of provision that is not forthcoming or an absence of quality standards is however dramatic. Besides the costs associated with recalls, the tarnished image is not quantifiable.

Should this not be another signal to invest in supply chain transparency?

75% of the companies interviewed in the “Supply Chain Resilience 2013” survey stated that they had recorded at least one supply chain disruption in the last 12 months on the one hand, but on the other, that they did not have full transparency of the risk of disruption in their supply chain.

Source: Supply Chain Resilience Study 2013 by CIPS & ZURICH

In the event of an unplanned supply chain disruption, only 9% of all global companies would be in a position to determine the impact within only a few hours, according to a survey by KPMG. Which consequently means that the response time for restoring the ability to supply as per the usual quality standard and level of cost is significantly longer than necessary, and that the impact is higher than necessary because of increased procurement logistics, quality costs and work effort on the part of the crisis team. Where losses amount to several hundred thousand euros and up to three-digit figures in the millions not a trifle – but rather, in some cases life-threatening.

And now for the last survey in this post:  According to the current Allianz Risk Barometer, business interruptions and the associated effect of these on the supply chain, as well as natural catastrophes are the most important risks that companies must consider from the beginning of 2014.

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All these insights and statistics show that there is an awareness of risk management – now it’s just a case of acting on this!

It is important to ensure in this regard that a holistic approach is taken on monitoring and assessing risks, i.e.

  • Consideration of multi-tier supply chains – not only direct suppliers but also subcontractors
  • Monitoring of locations, countries and strategic hubs (e.g. important ports or airports)
  • Besides key financial indicators, which are often already included in supplier monitoring, risk categories such as market conditions, political risks, compliance and CSR or natural catastrophes should also be taken into account  

The time and investment which is necessary to assess, monitor and mitigate risk may be worth it compared with losses which can be caused by a supply chain disruption.


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