No smoke without fire

18 January 2010

19 January 2010 | Jake Kanter

Businesses are dangerously unaware of supply chain risks, two recent studies have found, and procurement must take responsibility.

Supply chain risks have rocketed during the global economic downturn, as a glance at the SM archive reveals. Recessionary tactics, including hammering suppliers and cutting corners, have created a frightening list of concerns such as collapsed vendors, fallen product standards and failed deliveries.

Two studies last week, by research firm Mactavish and technology company Aravo, covering the UK and US respectively (see news, 19 January 2010), concluded that businesses are worryingly ignorant to risk so are doing very little.

Perhaps more concerning is that experts believe buyers and supply chain managers are largely mute on these issues.

Alan Day, managing director of procurement consultancy State of Flux, believes purchasers fear becoming the shot messenger. And that is if the message ever reaches senior management, adds professor Richard Wilding, director of the supply chain risk forum at Cranfield School of Management. Bad news can travel slowly through internal systems, he says: “If a potentially damaging supply chain event occurs, it has got to be thought about early, right across the business.”

In its annual report last week, the World Economic Forum said global decision-makers must cooperate to address risks and recognise them as connected events. It noted a lack of awareness of crime and corruption, cyber-vulnerability and biodiversity loss.

Buyers must be proactive and constructive about alerting colleagues to potential disruption. “If you approach risk in the right way, it will give your organisation a competitive advantage,” says Wilding. “Supply chain resilience can increase sales at a lower cost, as well as boost cash flow. If you focus on this you can convince the board, because you are talking the language of profit.”

Others believe there will need to be a cultural shift in procurement. The Mactavish research indicates companies are so preoccupied by cost- cutting they neglect risk. Purchasers are often the foot soldiers of cost cutting, says Martin Caddick, head of risk and continuity management at PricewaterhouseCoopers. For this to change, he believes savings targets must be softened and processes overhauled. Risk teams should be better integrated with procurement, he says, and buyers must be given the cash to invest in robust sourcing strategies.

“A multi-sourcing strategy might cost more, but it will reduce risk. It can also protect the reputation of your company,” he says.

SRM must also come to the fore, argues Wilding. For example, larger suppliers may be able to manage extended payment terms, whereas smaller ones will cope less favourably.

Better relations can also cut unnecessary costs.

 “Procurement seems to pay a lot for market research, when talking to suppliers will do. Regular communication is better than any financial analysis,” says Day.

All agree that mitigating disruption could mean the difference between securing senior recognition or, much like risk, flying below the radar.

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