A very risky business

31 August 2008
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01 September 2008

Supply chain risk is on the rise but not all companies have taken measures to protect themselves against disruption to business, as Jake Kanter reports

A recent survey of 50 blue chip companies asked: how do you identify supply chain risks?

The responses were lengthy and varied, and included "brainstorming" and "supply chain risk mapping".

A small group - 4 per cent - answered "other". Alan Day, managing director of State of Flux, a consultancy behind the study, says some simply explained they use their "intuition" to forecast hazards.

It highlights the lack of a unified approach to what is a growing issue. Figures from two new studies out last month pointed to a rise in supply chain risk over the past two years, with many firms suffering disruptions and financial losses as a result.

According to Alex Hindson, head of enterprise risk management at consultancy Aon, there is a multi-million pound example from the telecoms sector. A thunderstorm damaged thousands of mobile phone components at a Philips factory in New Mexico. Nokia and Ericsson, two of the vendor's biggest customers, reacted to the news very differently.

According to a paper by the Centre for Logistics and Supply Chain Management at Cranfield University, Nokia was quick to turn to alternative sources using Philips' plants in Asia to secure supplies. Ericsson didn't react as quickly and its single source initiative for the components damaged in the storm meant it had no alternatives. The company lost an estimated ?400 million (£321 million) in new product sales as a result.

But how involved is procurement in managing and monitoring risk? And what should buyers be doing to control some of these difficulties?

"A lot could be learnt from Nokia," says Hindson. "But supply chain risk can't be managed by one function. It needs procurement and risk managers to talk to each other and collaborate."

He urged purchasers to carry out the "Daily Mail test". This involves assessing whether their organisation would want to be on the cover of the newspaper because of a supply chain problem, such as child labour. If not, the company should consider how much it would be willing to pay to mitigate the risk and avoid the front page.

Gary Lynch, global practice leader, supply chain risk management practice at insurance broker Marsh, believes purchasers are becoming more important to managing risk. "Procurement is in a good position to map the supply chain all the way back to the source and identify supplies of greatest importance to the business. Purchasers must help to devise ways of monitoring critical supply, such as using data technology, to get information quickly and make informed decisions."

He adds purchasers should monitor political situations and be aware of threats to major ports. He says one of his clients had to redesign a logistics route because the goods being transported were seen as potential terrorist explosive materials and were not allowed to pass through a particular city.

Day argues it is difficult for purchasing to monitor everything, so it must be selective. "It has to ask three questions: can the company live with the risk? Can it insure against it? Or can it improve it?"

He says it is vital that procurement professionals help to push risk management to the top of the corporate agenda: "It might not be popular in tough economic conditions when it's all about showing cost savings, but it could be of great benefit to the business in the future."



SMsep2008

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