suppLy ChaIns DePenDency In An InCREASInGLy InTERCOnnECTED WORLD, SUPPLy CHAIn RISk IS BOTH A GROWInG PROBLEM AnD DIffICULT TO ASSESS ACCURATELy. fRESH THInkInG IS nEEDED, InCLUDInG THE ABILITy TO WORk WITH COMPETITORS TO DIG DEEP InTO THE LAyERS Of COMPLExITy THAT MAkE UP THE MODERn SUPPLy CHAIn, SAyS CLARE MORGAN Lessons learned from the Thai floods and the UK horsemeat scandal What is an extended enterprise? I n August this year, explosions at a container storage unit at the Chinese port of Tianjin killed more than 100 people and devastated large areas of the city. On top of the human loss, the blasts wreaked havoc in the automotive industry. Renault, Volkswagen and Hyundai were among the companies that lost around $625m worth of cars. Toyota and tractor manufacturer John Deere had to suspend production in the aftermath of the disaster; other companies suffered delays to vital shipments, and cargo flows were restricted at the usually busy port, forcing those dependent on parts from Tianjin to turn to air freight as an alternative export route. In such situations, supply chain resilience can be tested to breaking point and beyond. While the risk has long been on companies radars, many of the problems associated with supply chain breakdown over the past decade from the 2011 Thai floods to the 2013 UK horsemeat scandal have arisen because companies lacked awareness of their dependency on second-tier suppliers, or those further down the supply chain. Firms often do not dig deep enough into the location of their suppliers and how these businesses can rely on many layers of suppliers to create their own products andservices, in a network of dependency that has become known as the extended enterprise. In the days of modern communications, there is nowhere to hide. People are quick to call things out on social media Carolyn Williams TAP TO nAVIGATe PAGeS 1 2 3 4 5 6 7 8 Too many are poorly prepared. A recent report by the consultant KPMG found that only nine per cent of the respondents said they could assess the impact of disruptions within a matter of hours. For others, it can take days or weeks. According to Catherine Geyman, director of managed computer systems provider InterSys, and formerly risk manager at AstraZeneca, two of the biggest challenges companies face because of this networked way of working are the lack of visibility of the actual manufacturing source and how to prioritise the most critical supply chain exposures based on the value at risk. For a multinational organisation, the risk management of thousands of suppliers is not practical unless a prioritisation method is applied, says Geyman, who warns that the method should not be based purely on volume of spend. A more robust approach is needed, which should include quantification of financial exposure to all critical supply points (both internal and external, and first-tier and Xth-tier suppliers), she adds. Having built up a detailed picture of critical supply points, and taken steps to reduce key exposures, the final step is to monitor the status of those locations. Focusing on volume of spend can leave organisations very exposed to disruption. According to Geyman, one large pharmaceutical manufacturer was sourcing a particular grade of lubricant which it used in a wide range of its key products from a sole provider. It was inexpensive material, bought in relatively small quantities, and so not seen as a management priority for procurement risk. Volume of spend and value at risk, however, are different things. When the value at risk on this supplier was analysed, the pharma company realised that a major problem there would result in significant supply interruption across a range of products, Geyman says. The solution was straightforward a relatively small investment in a manageable volume of safety stock mitigated the majority of the exposure. Cristina Gutirrez, risk manager at Spanish leisure and gaming company Imar Grupo, says the need for modern businesses to be quick and agile, plus higher customer expectations, have made it more difficult for risk managers to assess supply chain risks. Commenting on how her own company manages its supply chain, shesays: We use key performance indicators as assessment tools, as well as the management and optimisation of processes. Currently the tools in our core business do not go beyond the classical connections and monitoring based on the push-pull strategy. However, the trend is towards the development of direct and userfriendly interfaces, which will make the process of data collection easier and enable the capture of information from suppliers, employees and customers. Although the role of the risk manager is more challenging then several years ago, their influence within companies is growing, Gutirrez says. In recent years, the company has had to adopt strategies proposed by the risk management department, such as supply agreements with competitors, identifying errors in the supply chain and reviewing supplier diversification. Some of our suppliers closed down because of pricepressures and the financial crisis, causing the industry to regroup. That situation automatically changed our level of risk and we had to use alternative risk management solutions. Tom Grand, regional director at risk consultancy Achilles in the UK and Ireland, says firms need to go against their competitive instincts when it comes to supply chain, and work collaboratively to agree common questions required of suppliers. Often, organisations ask the same suppliers for the same information, which is a waste of everyones time, he says. It is not a competitive advantage to comply with the law, so it is in everyones interests to ensure compliance across whole industries. Grand advises that compliance should be put in a centralised online portal, where it can be validated, updated and securely stored, enabling firms to set up automated alerts to warn buyers and suppliers when licences, insurances and certifications expire. In the final stage, companies should establish a risk model that determines which suppliers are subject to desktop and physical audits. In our experience, the most advanced companies in managing supplier risk are operating multi-regionally such as in FMCG and automotive, Grand says. These industries are using supply chain mapping tools to identify suppliers through the tiers. He says this approach works when a main contractor and its suppliers agree to work collaboratively to collect information from all levels of the supply chain. Each supplier confirms the products and services it provides, before revealing details of its own suppliers. Because the most high-profile supply chain issues often involve suppliers at grass-roots level, it is only by revealing the identity of suppliers that businesses can be proactive, rather than reactive, during a crisis. While disruptions in the supply chain can have an impact on production and, in turn, affect sales and revenues down the line the discovery of unethical practices has the potential to cause longlasting reputational damage, which can dog brands long after the issues have been put right. The Modern Slavery Act (2015), enacted in March, requires UK companies with turnovers of more than 36m to prepare a slavery and human trafficking report for each financial year, detailing the steps that they have taken to ensure there is no slavery or human trafficking within their organisation or their supply chain. While the legislation adds a compliance requirement, firms should already be focused on ensuring ethical standards are maintained throughout the supply chain, says Carolyn Williams, editor of IRMs 2014 extended enterprise report. If youre an organisation that claims to have values, you need to look through your supply chain to ensure that every part of that extended enterprise shares those values. Williams recommends organisations to think about mapping their extended enterprise. Risks dont come in a nice little area with a wall around it, stopping anything bad from happening, she says. While there is a moral imperative to get this right, there is a strong commercial imperative too, as a new generation of tech savvy and astute consumers shows a willingness to vote with its feet. Businesses that turn a blind eye to poor working conditions, child labour or environmentally damaging practices could find themselves boycotted and blacklisted in a way that may hit the balance sheet harder than any regulatory penalty. In the days of modern communications, there is nowhere to hide. People are quick to call things out on social media, Williams says. Publicity, such as that surrounding the poor working conditions in the UK garment industry, has been one of the most effective ways of driving change. UK retailers, she says, have been trying to assure customers that they have taken steps to improve working conditions at suppliers in Bangladesh after the Rana Plaza disaster. More than a thousand people were killed and 2,500 injured when the garment factory they were working in collapsed. Despite the potential cost, choosing the right suppliers is not always easy. Procurement officers are under pressure to source materials at the cheapest price and the economic downturn has exacerbated this. Furthermore, the need to find alternative suppliers, if you are going to terminate a relationship, means these problems cannot be solved overnight, Williams says. Youre often dealing, in a stewardship capacity, with other peoples assets, which makes it even more important to balance the money against the reputational risk, she says. Supply chain disruption in an interconnected world can take months if not years to unravel. While the incident in Tianjin port has caused huge disruption and financial loss, the longerterm repercussions could be even bigger. Early reports suggest that inadequate health and safety procedures may have been a contributing factor. If this does turn out to be the case, the pressure on companies to ensure they are not complicit in a further loss of lives is likely to increase again. For those who are unprepared, the eventual cost of such a disruption can be immense. Lessons learned from the Thai floods and the UK horsemeat scandal Tom Grand: Both incidents highlight the need for firms to source information from all tiers of the supply chain. In automotive, businesses learned that one issue affects all when certain factories closed, the inability to quickly source components affected multiple brands. The horsemeat scandal resulted in a rapid escalation in consumer interest about where their food comes from and how it is produced. Both industries are now leading the way in supply chain mapping. Catherine Geyman: There has been a push in the food sector to simplify the most complex supply chains and to exploit more opportunities to source locally. The food industry is not alone in reassessing its ability to reverse some of the outsourcing activities of the past decades; the pharma industry is also seeking more manufacturing opportunities at home, with projects such as the RE-configuring MEDIcines End-to-end Supply (REMEDIES) project, a 23m scheme co-funded by the UK government and industry partners to redesign the UK pharma supply chain. What is an extended enterprise? A structure in which a number of organisations come together in a joint endeavour to achieveoutcomes that none of them could achieve ontheir own. By collaborating andspecialising, many contributors are abletoachieve more successful outcomes, butthis meansno organisation has direct controloverevery aspect of its operations orreputation.