1 July 2013 Advice, Community

Managing supply-chain risk

The recent factory collapse in Bangladesh and the horsemeat scandal have highlighted the fact that supply chain risk is not just associated with natural disasters. Business Voice asks Vincent West, head of business continuity practice at Aon Global Risk Consulting, what lessons firms can learn from these events.

Q. Why are we seeing more of these preventable supply chain issues – and is that a trend that’s likely to continue?
A. Surveys published by the Business Continuity Institute over the past three years suggest that the number and impact of such events is growing year on year. Both well publicised incidents and increased stakeholder expectation have led to an increased focus on the supply chain.

These risks aren’t necessarily directly attributable to globalisation, but rather to the desire to drive cost out of the supply chain. This cost cutting has, in certain circumstances, contributed to increased fragility in the business model.

For example, lower levels of inventory – characteristic of lean or just-in-time operating models – can leave organisations exposed to disruption much faster, because they don’t have a buffer to fall back on. A focus on cost reduction might also drive suppliers to cut corners and adopt practices that put their employees and business at risk, thereby threatening the continuity of supply.

Q. When incidents can vary widely in their nature, how do you characterise the risk that firms should be aware of?
A. Traditionally, the supply chain was predominantly managed for cost. But increasingly, organisations are articulating objectives around quality, ethical sourcing and social responsibility. All of these place different demands on the supply chain in terms of visibility, traceability, quality assurance and the like – but it can be difficult to oversee all the suppliers and business partners involved to ensure that they meet these objectives.

Q. What damage can these kind of incidents cause to UK companies?
A. The direct impact from not being able to supply goods and services will be lost revenue, and erosion of customer base or market share. The less tangible effects are reputational and brand damage. These typically manifest themselves as a reduction in shareholder value or a fall in the brand valuation, which can be far more financially significant.

Q. How can companies protect themselves from this kind of risk?
A. They need to get visibility of the supply chain for their critical products and services. It is essential that all relevant functions within the organisation – from procurement through to logistics and operations and legal and PR – are involved in setting supply chain objectives for the organisation.

This can then feed into the supplier selection process so they can choose and monitor suppliers that can demonstrate an ability to deliver. Unlike mitigation against natural disasters, management of supply chain risk gives organisations the opportunity to proactively engage with key suppliers, and even leverage their spend, to secure any improvements they might need.

But it’s impossible to eliminate risk entirely. So companies need to have adequate insurance, continuity plans and product recall measures in place – and ensure their suppliers have similar arrangements in place to cover their own supply chain.

Q. How should firms weigh up the risks and the opportunities in outsourcing to emerging markets?
A. The organisation will only gain a framework against which the benefits of outsourcing (typically cost reduction) can be weighed by charting the costs that could arise from a disruption in the supply chain – lost revenue and customers, brand damage, fines and penalties, such as loss of operating licences. But the decision to outsource needs to include an appreciation of how risk is viewed and treated in the prospective territory.