Global supply chains and transport networks form the backbone of the global economy, fuelling trade, consumption and economic growth. When these supply chains get disrupted in some way it can potentially have major repercussions for companies and more importantly the global economy. Disruption to supply chains can prove very costly, as highlighted recently by significant flooding in Europe. According to research conducted by Accenture, significant supply chain disruptions have been found to cut the share price of impacted companies by as much as 7% on average.
What these disruptions have highlighted is that Supply Chain Directors need to basically shift their focus from reactive to proactive risk management. The global economy has been severely impacted by numerous natural disasters in recent years. Over the past 24 months there has been a significant shift in the type of disruption which has impacted global supply chains with extreme weather now the number two most common type of supply chain disruption.
There have been a number of examples of significant natural disasters and extreme weather to hit global supply chains over the past couple of years.
- European Floods – 2013 – Significant rainfall in Eastern Europe had a major impact on manufacturing companies. For example Porsche had to temporarily close their factory in Leipzig, Germany after floods in the Czech Republic halted the supply of Cayenne bodies which are built in the VW plant in Bratislava.
- Hurricane Sandy – 2012 – This hurricane was the most powerful and deadliest to hit the North Eastern Coast of the United States causing over $68Billion in damage to buildings and infrastructure across 24 states. Hurricane Sandy prompted the worst fuel shortages in North America since the 1970s
- Japanese Earthquake/Tsunami – 2011 – The earthquake brought severe devastation to utility infrastructures and the resulting Tsunami brought longer term disruption to global supply chains due to many factories being flooded causing production to be suspended
- Thailand Floods – 2011 –High tech supply chains were severely impacted by the floods in Thailand which resulted in the disruption in the supply of key components such as hard disk drives to the computer industry. The impact of the floods persisted into early 2012 with more than 1000 factories being impacted and subsequent insurance claims reaching $20Billion. As a direct result of the floods, Thai GDP growth projections decreased from 2.6% to 1%. Flooding will continue to be a common theme as 25% of Thailand’s provinces were affected by flooding in 2012.
As many global economies start to recover from a major economic downturn it is in each country’s interest to ensure that it is business as usual when disaster strikes. Increasing supply chain resilience was one of the key themes of the annual meeting of leading countries belonging to the World Economic Forum in January 2013. Building extra resilience into a supply chain should be on every CEO’s agenda, especially if they operate a truly global supply chain across manufacturing hubs located in Japan, Europe, North America, South America and China. But what exactly is resilience?, one quote taken from Accenture’s recent report from the 2013 World Economic Forum states that “Resilience is the ability of a global supply chain to reorganize and deliver its core function continually, despite the impact of external and or internal shocks to the system”. Another more succinct quote - ”The ability of a system to return to its original or desired state after being disturbed”.
Minimising supply chain risk through increased resilience has become one of the top priorities for Supply Chain Directors around the world. Many operational based changes have been implemented to try and remove the potential for risk impacting a global supply chain, for example:
- Near shoring – sometimes referred to as reverse globalization, initially started to happen in 2009 as a way of shortening logistics networks. Increased wage rises in China followed by the recent natural disasters caused many companies to think about relocating manufacturing capacity back to their home market. For example Caterpillar moving production of their small bobcat excavator from Japan back to North America
- Establish a global plant floor – this is a term coined by the analyst firm IDC, and describes how manufacturers are spreading their production capacity to other plants located in different parts of the world. This is so that if disaster strikes again and one manufacturing plant is taken offline they can switch to an alternative plant to maintain production capacity.
- Dual sourcing strategies – constant disruption over the past couple of years combined with a need to source from the Far East has led to many companies thinking about implementing dual sourcing strategies. So if disruption occurs across a supply chain then the manufacturing company can quickly switch to an alternative provider of components/parts.
Over the past 12 months concerns have remained about external threats to supply chains and systematic vulnerabilities such as oil dependencies and information fragmentation. Additionally, growing concern around cyber risk, rising insurance and trade finance costs are leading supply chain experts to explore new mitigation options. There has been so much disruption across global supply chains in recent years that Accenture research indicates that more than 80% of companies are now concerned about supply chain resilience. Risk management must be an explicit but integral part of supply chain governance and to achieve this Accenture made the following recommendations:
- Institutionalise a multi-stakeholder supply chain risk assessment process rooted in a broad based and neutral international body
- Mobilise international standards bodies to further develop, harmonize and encourage the adoption of resilience standards
- Incentivise organisations to follow agile, adaptable strategies to improve common resilience
- Expand the use of data sharing platforms for risk identification and responses
So far we have only covered risk management across the physical supply chain but as more traditional supply chains evolve into digital supply chains then risk management will need to be applied to this area as well. For example the increasing growth in eBook sales and the use of 3D printing techniques promises to shorten at least some of the linkages in the physical supply chain. With more information being transmitted digitally, there is a greater chance of cyber risks hitting global supply chains and participants across a digital supply chain will have to demonstrate that they can master digital resilience as well as physical resilience. Given the exponential growth in non-physical supply chain flows, their inherent cyber risks must be understood and incorporated into overall resilience approaches.
In addition to introducing operational based changes, supply chain directors should be looking to improve their ICT based infrastructures as well. According to Accenture, if configured correctly then, ICT infrastructures can provide significant resilience gains through four main channels, analytics, data and information sharing, scenario modelling and pre-programmed responses. The corner stone of IT based resilience is data and information sharing. Business continuity is enabled through access to real time data followed by rapid dissemination of data driven supply chain fixes. However information sharing infrastructures depend on a resilient core network, appropriate communication tools and an element of redundancy. Combined, this requires an ICT infrastructure that is flexible, scalable, secure and re-routable.
In my next blog entry I will describe how the implementation of B2B tools and services can help provide the afore-mentioned cornerstone to improved resilience against future supply chain disruptions.