Supply Chain Risk: Understanding Emerging Threats to Global Supply Chains

Transcription

1 Supply Chain Risk: Understanding Emerging Threats to Global Supply Chains Prof John Manners-Bell, Logistics and Supply Chain Council, WEF CEO, Transport Intelligence Sao Paulo, March 2015

2 Changes in SCM have created new problems Traditional manufacturing In-house production Internal processes and controls Local production in Western markets Developed compliance regime Short distance to final market Little international trade Virtual supply chains Unbundled and out-sourced Limited control over processes Remote production Nascent compliance regime Long distance to market International trade regulations and quotas 2

3 Changing characteristics of Supply Chain Risk Over the years, internal risks have fallen as supply chain strategies have developed JIT, Lean Inventory, Quick Response etc However external risks from disruption whether natural disaster, terrorism, economic shocks etc have increased. Inventory levels down External risks up 3

4 Modern Supply Chains are less resilient Modern supply chains have the following attributes: Lean inventory Centralised Just in time Remote production Use of developing countries Multiple tiers of suppliers They are designed to keep labour and inventory costs to a minimum, but also create SYSTEMIC VULNERABILITY Bob Lutz, former vice chairman of General Motors says it best; Running your procurement purely on a short term, point in time, cost minimization model is like shopping for rock bottom home insurance. It looks real smart until your house burns down. 4

5 Mitigating supply chain risk Manufacturers usually adopt one of three strategies when dealing with risk: Inventory management build up buffer stock Sourcing developing contingency strategies for specific suppliers or supply chain links Acceptance doing nothing as costs of mitigation outweigh benefits of lean supply chain strategy Deciding on which strategy to adopt relies on understanding the cost implications of each approach. 5

6 Visibility issues Lack of visibility creates problems Some companies may audit the behaviour of Tier 1 suppliers but have no idea of who their Tier 2-5 suppliers are. This has implications for all forms of supply chain risk Visibility of supplier practices reduces the further upstream 6

7 Sectors most at risk The high tech sector being most globalised and with largely out-sourced production is the most exposed to external shocks 7

8 The role of Technology The development of information technologies will play an important role in the mitigation of supply chain threats. There is little prospect that these risks will diminish some may even increase. The ability to react to events will become the key competitive differentiator, and technologies which enable an enhanced level of supply chain agility will become highly sought after. However the adoption of more technology will also play a role in increasing risks. Increasing reliance on technology will leave supply chains open to cyber attacks or even accidental outages. Whilst technology will lead to greater levels of efficiency, it will also mean that maintaining robust networks will be ever more critical. 8

9 Supply Chain Risk Decisions Cargo crime Natural disasters Labour CSR Corruption Shipping Piracy Terrorism EXTERNAL RISK Remote or Nearsource? DIRECT COST Inventory Pandemics Civil unrest Trade barriers Banking BUSINESS ENVIRONMENT ICT Warehousing Bureaucracy and regulation Transport infrastructure Skill set 9

10 Risk a definition Risk = Probability (of a given event) x Severity (negative business impact) Risk can be categorised into three types: Known and prepared for Events have occurred in the past and should be prepared for in the future (although and time, place and severity unknown) Known and unprepared for Events have occurred in the past but corporations/governments have failed to prepare Unknown unknowns impossible to predict but could do major damage, so-called Black Swans 10

11 Unknown unknowns Just because Black Swan events cannot be predicted, does not mean that you cannot prepare. Rather than look at past events in order to gain some insight into the future, the best defence is to identify weaknesses in your supply chains instead. Addressing vulnerability is the best way to mitigate the impact of a disruption. Future supply chains will be about resilience not just lean 11

12 Case Study: Japanese Tsunami 2011 Direct cost 133bn in Japan alone Cost to global supply chains much greater Japanese electronics sector hardest hit, with many consequences for the automotive sector. Chemicals also affected Honda s and Toyota's plants in the UK shut down production due to interruptions to component supply 12

13 Automotive sector impact Ford, once famous for offering any colour you like, as long as it s black could no longer deliver its tuxedo black cars as the pigment was produced only by a single producer; which was based near the Fukushima nuclear plant Unknown to each other Chrysler, GM and a number of German car companies also used the pigment in their paints; but as they sourced their paints from different suppliers none were aware that they relied ultimately on this sole producer. Manufacturers should share more information and go for transparency to ensure that a single third or fourth tier of supplier s failure could not have such a big impact on their supply chain. 13

14 Japanese tsunami impact No visibility or lack of preparedness? Onahama Plant, Japan Xirillac 14

15 Best practice: Cisco s response to the tsunami Within 30 minutes of the initial alert of the earthquake, the supply chain incident manager was made aware of the event, alerted both the SCRM team lead, team members and the Supply Chain Operations senior leadership team. Within 12 hours, the primary supply chain incident management team was activated. This team consists of a group of operations functional leaders that represent their functional organizations during an incident. Utilizing Business Continuity data and processes, all direct suppliers, their associated sites and components and other critical supply chain nodes in the impacted area were identified within 12 hours of the initial earthquake. Cisco established a Supply Chain Incident Management Team War Room within 2 days of the initial earthquake to provide a central management point and decision making forum for all Supply Chain Operations personnel involved in the mitigation effort. 15

16 Cisco s response to the tsunami In the first few days following the incident Cisco s incident management team was able to: Establish contact with suppliers to assess the impact of the incident on site capacity Develop a prognosis of their ability to continue to produce Identify their ability to distribute components. The incident management team was then able to develop a snapshot of the supplier impact and status over the entire region. This snapshot was refreshed on a daily basis based on the evolution of the crisis circumstances (e.g. addition of the nuclear exclusion zone around the Fukushima nuclear facility, changing electrical power capacity projections, etc.) and facilitated faster, more informed executive decision making on mitigation activities and prioritization. 16

17 Interested in finding out more? Books by John Manners-Bell Global Logistics Strategies: Delivering the Goods Published November 2013 Kogan Page Supply Chain Risk: Understanding Emerging Threats to Global Supply Chains Published April 2014 Kogan Page 17