A failure to assess and protect against a supplier's property and business interruption risk could leave you without a critical component at a moment’s notice. This, in turn, can have a negative impact on your ability to reliably meet your customer demand, impacting your company's market share, reputation, and even shareholder value.
A study that we carried out with Oxford Metrica shows that companies with best practice property risk management programmes across the supply chain produced earnings that were, on average, 40 per cent less volatile than companies with less advanced risk management practices.
Recent natural catastrophes have shown that the web of commercial dependencies can be very delicate. In the manufacturing industry, it has now become the norm to rely on just-in-time principles and single-source arrangements to keep costs under control and maintain profitability. However, from a risk perspective, this means that a supply chain disruption is more likely to have immediate and severe consequences.
For instance, the explosion at a German auto supplier in March 2012 brought the entire auto industry to a halt as auto suppliers were faced with the possibility of a key chemical shortage that could have shut down car production in the United States, Europe as well as in Asia. Luckily, solutions were found, although most car manufacturers were left facing the the unknown for several weeks.
Businesses that manage uncertainty within the supply chain will outperform competitors and create real and sustainable competitive advantage. For instance, analysts have given the floods in Thailand as the primary reason for Seagate Technology recapturing the worldwide lead in hard disk drive shipments in the last quarter of 2011. Seagate located its HDD manufacturing plant in Thailand on high ground, so it was less adversely affected by the floods and was able to continue business as usual and as a result gain the market leadership position, while its competitors were unable to continue.
The world is rapidly changing and uncertainty has become the norm. What is certain though is that companies that are able to protect their supply chain are much more likely to create financial stability in the long term. A framework where resiliency is factored into the design of a supply chain, where open collaboration exists between a company and its suppliers, and supply chain’s agility and flexibility is built into a risk management culture, is a long-term vision for companies to aspire to.
☛ Philip Johnson is vice president – operations manager northern Europe operations at FM Global