Supply chains - Recent supply chain failures such as the horse-meat scandal and the 2011 Thai floods have led to improved risk management, but serious weaknesses remain.
Recent supply chain failures such as the horse-meat scandal and the 2011 Thai floods have led to improved risk management, but serious weaknesses remain, says Catherine Geyman of Intersys Risk.
On 4 September 2013, a fire destroyed a large part of SK Hynix’s production plant in Wuxi China, which is responsible for 10-15 per cent of the world’s supply of dynamic random access memory (DRAM), including to Apple. Within a month shortages of DRAM had pushed up its prices to a three year high.
Events like these, the more serious 2011 Thai floods and the horse meat scandal in early 2013 have been a catalyst to improving cross-company supply chain assessment and visibility, but significant weaknesses to the containment of financial exposures from supply chain interruptions remain.
Criticality: One of the most serious is a tendency for businesses to focus on the suppliers where they spend the most money, rather than the ones whose production is the most critical. The loss of certain small components at an early stage of manufacture can have as big an impact on continuity of production as a much more expensive part closer to market.
Take for example amedium-sized pharmaceutical manufacturer that spends less than $30,000 a year on a small volume of special high grade talc, which is used an excipient in its multiple proprietary drugs.
This talc is only available from two approved plants, both of which are located within the same active earthquake zone. If a large earthquake hits the area, the pharmaceutical manufacturer is exposed to a $400 million loss in profits - even with one month’s strategic stock holding.
Visibility: Another critical issue is lack of visibility of the whole supply chain. When a fatal explosion occurred in a German manufacturing plant in 2012, the automotive industry felt secure that it had multiple sources of nylon-12. It was unprepared for the manufacturer’s proportionally more important production of cyclododecatriene (CDT), which is a precursor to nylon-12. The result was a shortage of nylon-12 which continued for months.
The most important steps to remedy these situations are:
• identifying suppliers by their importance to the value streams rather than expenditure;
• collecting good data on suppliers outside the manufacturer’s immediate control; enterprise resource planning (ERP) systems do not hold the answers to everything;
• commitment from senior management to the cross functional co-ordination needed to deliver the complete picture;
• quantifying potential business interruption and indirect or contingent business interruption losses.
For a multi-national organisation, the risk management of thousands of suppliers and internal sites is not practical without a prioritisation method. Account needs to be taken of the level of risk exposure by tapping into data used for business planning purposes to identify:
• Long term sales and gross margin forecasts;
• Loss in market share as the result of supply interruption;
• Strategic stock holding at all points in the supply chain;
• Availability of alternative sources.
Spend v exposure
Managing suppliers according to size of spend overlooks the possibility that a relatively low cost but, nonetheless, unique contributor to a product could present a disproportionately high risk to a value stream, as in the talc example.
A relatively low cost, stable product like the talc, presents a straightforward solution. Buying and storing a 12 month strategic stock is neither disproportionately expensive nor is the storage is demanding.
This, however, may not always be practical, and there will have to be a different solution. Either way, businesses need a clear method for understanding and accurately quantifying their supply chain exposures to manage the risk of a material, even catastrophic, business interruption loss and reputation damage.
Internal cost v exposure
For companies manufacturing multiple parts of a product, the early stage exposures are often valued only in terms of the cost of production. However, these stages can still be unique with the same potential profitability impact as ones closer to the market.
Manufacturers can benefit from tools that enable them to visualise their end-to-end supply chains and to quantify financial losses resulting from supply chain failures.
Once critical supply chain structures are visible, they can be stress tested with different threats and scenarios, ranging from fires and natural hazards through to contamination and product recalls. In this way companies can determine the resilience of their supply chains to a variety of situations without having to learn by expensive experience.
Catherine Geyman is founder of SCAIR™ and a director of Intersys Risk.
Catherine Geyman - Intersys Risk