Disaster Looms: Why Today's Global Supply Chains Are At Risk
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The recent occurrence of faulty ignition switches in General Motors cars should serve as a wakeup call to companies that lack good visibility into their global supply chains. But most have failed to implement adequate supply-chain risk-management programs that could head off such problems.
That’s the view of Yves Leclerc, managing director with business consultancy West Monroe Partners. Despite a raft of natural disasters and quality failures over the years, he said, many companies have yet to step up to the requirements of an effective risk-management effort.
You might think that 13 deaths and the the recall of 6.1 million cars since February would have top manufacturing executives scurrying to adopt controls that would prevent such nightmares from occurring in their own organizations. And maybe they are. But neither the 2013 floods in Thailand nor the 2011 earthquake, tsunami and nuclear disaster in Japan has resulted in sweeping risk-management measures, Leclerc said. The business world, it would seem, has a short memory.
Many companies remain fixated on boosting shareholder value in the short term. It can be tough to sell top executives on the value of expensive programs that could shield them from disruptions caused by disasters, natural or otherwise. What is the value of a non-event?
Leclerc was disheartened to hear one of his clients brush off the necessity of a plan for coping with lost or delayed containers, even during the critical peak-shipping season. “His reaction was, ‘If I’m in trouble, all my competitors will be, too. It’s no big deal.’”
Even the most innovative companies are vulnerable. Leclerc cites the allegedly defective gas pedals that forced Toyota into a $1.2-billion settlement with the U.S. Justice Department, with recalls numbering in the millions. Toyota is considered to be one of the pioneers of assembly-line quality and efficiency. Yet it found itself facing accusations of criminal mismanagement.
If multi-billion-dollar enterprises like GM and Toyota can’t avoid costly lawsuits due to quality glitches or poor management, how can smaller companies weather their own supply-chain disasters? On top of that, revelations of poor working conditions in overseas factories can have a serious impact on global brands. Regardless of the issue, it all comes down to a lack of visibility, coupled with inadequate response plans when the inevitable problems occur.
The new emphasis on sustainability and safety only exacerbates the challenge. A recent report from the Supplier Ethical Data Exchange (Sedex) found inadequate controls and a lack of compliance with both local and international law among companies doing business in Mexico, Brazil, Colombia and Peru. Management in those countries is failing to meet rules on the environment, health and safety and working hours, Sedex said. The state of affairs extends beyond Latin America — witness the deadly factory fires that occurred in Bangladesh over the past three years.
Leclerc believes companies need to take a multi-pronged approach to risk management. He cited the concept of the “Triple-A Supply Chain,” a term coined in 2004 by Stanford University professor Hau L. Lee. The idea of supply chains being “agile, adaptable and aligned” can apply just as much to the discipline of risk management, he said. The quality of “alignment” is especially relevant to the conversation about risk: it acknowledges the fact that good supply-chain management ranges far beyond the walls of an individual company, to embrace multiple tiers of suppliers upstream, and service partners and customers downstream.
A workable action plan, said Leclerc, must be executed at the strategic, tactical and operational levels. From a strategic perspective, companies need to map their global supply networks. In the process, they gain knowledge of the impact that a disruption will have on operations. Tactically, they should look to the end-customer to achieve a full understanding of demand, and how a fall or rise in supply will impact service. Operationally, they should be zeroing in on execution-based tasks like warehousing and transportation. Functions related to “basic blocking and tackling” shouldn’t be overlooked as important means of alleviating global risk, Leclerc said.
In all cases, companies must ensure continuity of supply, should current feeds be interrupted. Many seek to cut costs and boost purchasing power by reducing suppliers to a bare minimum. While that strategy can result in a leaner supply chain, it shouldn’t rule out the use of alternative vendors that can be called on in a emergency.
Good risk management is both a technology and business-process effort, Leclerc said. Companies have spent untold amounts of money on enterprise resource planning (ERP) systems to manage financials and other basic functions, but they’re less advanced in acquiring systems that enable end-to-end visibility and collaboration among all supply-chain partners. At the same time, they need to tear down the functional “silos” that keep various disciplines from communicating key information on raw materials, goods in production and inventory throughout the chain.
That’s the view of Yves Leclerc, managing director with business consultancy West Monroe Partners. Despite a raft of natural disasters and quality failures over the years, he said, many companies have yet to step up to the requirements of an effective risk-management effort.
Many companies remain fixated on boosting shareholder value in the short term. It can be tough to sell top executives on the value of expensive programs that could shield them from disruptions caused by disasters, natural or otherwise. What is the value of a non-event?
Leclerc was disheartened to hear one of his clients brush off the necessity of a plan for coping with lost or delayed containers, even during the critical peak-shipping season. “His reaction was, ‘If I’m in trouble, all my competitors will be, too. It’s no big deal.’”
Even the most innovative companies are vulnerable. Leclerc cites the allegedly defective gas pedals that forced Toyota into a $1.2-billion settlement with the U.S. Justice Department, with recalls numbering in the millions. Toyota is considered to be one of the pioneers of assembly-line quality and efficiency. Yet it found itself facing accusations of criminal mismanagement.
If multi-billion-dollar enterprises like GM and Toyota can’t avoid costly lawsuits due to quality glitches or poor management, how can smaller companies weather their own supply-chain disasters? On top of that, revelations of poor working conditions in overseas factories can have a serious impact on global brands. Regardless of the issue, it all comes down to a lack of visibility, coupled with inadequate response plans when the inevitable problems occur.
The new emphasis on sustainability and safety only exacerbates the challenge. A recent report from the Supplier Ethical Data Exchange (Sedex) found inadequate controls and a lack of compliance with both local and international law among companies doing business in Mexico, Brazil, Colombia and Peru. Management in those countries is failing to meet rules on the environment, health and safety and working hours, Sedex said. The state of affairs extends beyond Latin America — witness the deadly factory fires that occurred in Bangladesh over the past three years.
A workable action plan, said Leclerc, must be executed at the strategic, tactical and operational levels. From a strategic perspective, companies need to map their global supply networks. In the process, they gain knowledge of the impact that a disruption will have on operations. Tactically, they should look to the end-customer to achieve a full understanding of demand, and how a fall or rise in supply will impact service. Operationally, they should be zeroing in on execution-based tasks like warehousing and transportation. Functions related to “basic blocking and tackling” shouldn’t be overlooked as important means of alleviating global risk, Leclerc said.
In all cases, companies must ensure continuity of supply, should current feeds be interrupted. Many seek to cut costs and boost purchasing power by reducing suppliers to a bare minimum. While that strategy can result in a leaner supply chain, it shouldn’t rule out the use of alternative vendors that can be called on in a emergency.
Good risk management is both a technology and business-process effort, Leclerc said. Companies have spent untold amounts of money on enterprise resource planning (ERP) systems to manage financials and other basic functions, but they’re less advanced in acquiring systems that enable end-to-end visibility and collaboration among all supply-chain partners. At the same time, they need to tear down the functional “silos” that keep various disciplines from communicating key information on raw materials, goods in production and inventory throughout the chain.
