Natural disasters, strikes and more mundane occurrences such as factory fires have all kept supply chain risk in the news. Recent examples include Pace losing $55m due to floods affecting Asian suppliers and the car industry losing up to half its supply of brake lines after a single factory shut down in Germany.
This abundance of coverage does not mean that risk itself has increased but simply reflects the vulnerability of businesses which rely too heavily on a limited number of suppliers. This exposure to risk has been further magnified as organisations strive to drive down costs and create leaner supply chains.
4C Associates brought together several leading supply chain professionals to explore these issues and others, currently at the forefront of supply chain. Topics discussed included reducing supply chain risk, how to mitigate the impact of rising fuel prices, collaboration as a means to reduce cost and how to apply lean thinking to the supply chain “back office”.
Managing Supply Chain Risk
Downsized supply chains leave organisations in a difficult position with regards to protecting against unpredictable events such as natural disasters. There are limits to the level of risk which can be offset, especially when working with complex supply chains and far away suppliers. A return to the traditional model of stockpiling products and ultimately increasing redundancy is a potential but unattractive solution.
One participant considered the ramifications of one of his suppliers being unable to deliver. He explained that his company usually had 20 weeks’ worth of products in stock and that an unforeseen event affecting one of his few suppliers could have a dramatic impact. Due to the nature of the business it is unlikely that a supplier would be out of action for more than 12 weeks, however, the potential ramifications would be huge.
“Essentially if we were unable to deliver we would lose face in retail and that would be a very long road back.”
It is not only inbound supply which is an issue, there are also risks associated with outbound products. Ed Ainsworth highlighted the experience of one business whose packaging supplier was unable to operate due to a fire. The company was forced to carry out a very expensive process in order to get its operation back on track.
“We don’t have a backup. Even where we could have one we don’t. We’re just not thinking that way and one day we could get caught out.”
Another danger which needs to be taken into consideration is the need for extra precautions when outsourcing from operations based in the Far East. Getting supplies from these areas can take many weeks and even a small delay can have huge consequences for businesses working within a tight timeframe.
An attendee shared his experience of being in a situation where a supplier could potentially have been declared bankrupt. This prompted his company to act and invest a substantial amount of money in developing a backup plan. He explained that although the investment seemed high at the time, having a plan B is an important element of any business strategy.
“It can be costly and it’s a big premium in terms of insurance but you need to protect your business.”
The level of potential supply chain disruption varies depending on the way in which a business is structured, with centralised operating models being more at risk. One attendee said his company was set up in such a way as it would be able to pull together and work with an affected branch if needed. People coming together and helping each other in times of crisis is an important element of coping with disruptive events.
Sustainability in an Era of Energy Price Rises
Rising commodity prices and especially fuel costs are a growing concern for supply chains. The continued growth of the Chinese economy, coupled with the recovery of the US market, is likely to maintain the steady rise in fuel costs. An increase in the cost of fuel extraction will also contribute to keeping prices high.
4C has modelled the potential impact of fuel price increases on the supply chains of several companies and found substantial variations in how they are affected. Some proved extremely robust whereas others would be hit by huge cost increases. At the other end of the spectrum, some companies would benefit from an increase in price, as their supply chains were less sensitive to fuel price increases than their competitors.
“The key is ensuring commercial colleagues future proof their operations based on predictions for next year’s fuel cost. We have started looking at biofuels as a possible alternative.”
Craig Bunker questioned the viability of centralised inventory business models. He argued that businesses should begin looking at ways of decreasing product mileage and build new models based on estimates of fuel prices at least five years down the line.
“We may have to tell retailers that if they want to maintain prices we need to reduce deliveries.”
The tipping point for organisations to begin implementing network changes was identified at a price of $150 per barrel. Customers are not bearing the costs of these increases and suppliers may need to reduce the frequency of deliveries to keep prices down. Another solution would be increasing or relocating depots and out bases to reduce mileage.
Interestingly, this was not a universally shared view; some participants felt that fuel costs were not a key consideration. Suppliers of high value goods would not be as affected by a rise in fuel prices as suppliers of lower value goods. An increase in fuel expenditure would therefore not translate into a universal need to implement a different business model.
Innovation and Collaboration
The discussion moved on to new and emerging delivery models with B2C deliveries being described as unsustainable, unprofitable and not environmentally friendly. In addition, studies have demonstrated that people shopping online spend less than those in store. This is because they are not enticed by the promotions displayed throughout the shopping area.
It was argued that B2C deliveries work when viewed as an economy of scale. A retailer which simply refuses to sell its products online will also lose the customers who frequent its physical shops. The key consideration is looking at the overall profitability per customer and maintaining brand loyalty.
All participants agreed that despite the current economic climate there remained many opportunities for businesses to innovate and work together. Suppliers have been working to trim their supply chain costs for years and many feel there is little opportunity for further savings. Efficiency is now an important area for suppliers to target and working together is the best way forward.
“I’m having conversations with competitors which would have been impossible a few years ago.”
Collaboration was singled out as the key opportunity to emerge from the current climate. Examples were given of various retailers and suppliers working together to increase their own efficiency. This is a natural response to a difficult economic environment in which innovation is an important element for businesses looking to become or remain successful.
The major problem is how to drive this collaboration. Industry leaders will have the difficult task of working together to standardise various procedures in order to increase efficiency.
Participants were able to name some instances of competitors cutting costs together, however, these remain relatively isolated incidents. An example of an area where collaboration is necessary was identified as the implementation of common delivery times and standards by retailers.
Back Office Efficiency
“Can you apply lean working to administrative tasks to the same extent as in manual labour?”
Cutting down on certain planning and administrative processes is largely unexplored territory for lean thinking. Much of the work which is carried out in offices across the globe has the potential to be automated. The main issue is differentiating between value adding activities and those which can be computerised. This is further complicated by the fact most office workers do both.
“I look at my competitors and they operate differently. They have more stock and fewer people; it’s a case of balancing the tasks which require reflection with those which can be automated.”
There is a real need for businesses to conduct in-depth analysis in this area, and separate the tasks which can be automated from those which require human intervention. The reality is that there are significant savings and improvements available to those who implement solutions such as automatic ordering processes.
In a similar vein participants expressed their surprise at the limited number of people trained in inventory management. This was highlighted as an issue which the industry needs to tackle. One attendee described inquiring about training only to be told it would take three weeks. His initial thought was that the system must be inefficiently designed, however, the importance of taking full advantage of these complex solutions cannot be understated.
“There are so few people trained in inventory management that I couldn’t find one to train my people.”
The mentality of the industry was called into question with several participants stating that many are happy with just an “instruction manual and never mind the training”. This was further illustrated by the Chartered Institute of Purchasing and Supply not having inventory management training as part of its core qualification modules.
One attendee explained that when his business provided a client with an inventory management system it came with a monthly training service to ensure its proper use. The potential benefits of a fully implemented system are huge, and several participants said they managed to reduce stock by 30%.
“Necessity is the Mother of Invention”
Despite allusions to mounting fuel prices and stagnant economic growth, there is little doubt that there is opportunity to be found in the current climate. The difficult situations currently faced by suppliers, retailers and consumers are driving all three to new and innovative ways of doing business. Cross sector and industry collaboration, for example, is emerging as the most exciting development in supply chain in recent years.
On the evening of the 19th April 2012, 4C assembled a group of supply chain leaders from different industries at Maze by Gordon Ramsay, Mayfair. The event was chaired by Ed Ainsworth, 4C’s Managing Director.
Attendees included Andy Banks, Supply Chain Development Manager at Waitrose, Ewan French, COO at Barloworld, Jeremy Hawkins, Head of Logistics EMEA at Treasury Wines Estates, Martyn Saville, VP Logistics at Universal Music Operations and Nick Weetman, Operations Director at IAWS Foods (Delice de France).