by Mark Morley, director of industry marketing for manufacturing at GXS.
The current flooding crisis gripping much of the UK highlights how vulnerable global supply chain and transport networks are to disruption. Globalisation has helped to fuel trade, consumption and economic growth, but also means events such as natural disasters and extreme weather have even more widespread economic consequences.
Research conducted by Accenture showed significant continuity issues can cut the share price of affected companies on average by seven per cent. Alongside the increasing impact of natural disasters in recent years, the past 24 months has seen a substantial shift in the main causes of disruption, with extreme weather now the second most common cause. This demonstrates the need for supply chain directors to shift their focus from reactive to proactive risk management.
Recent examples of extreme weather and natural disasters disrupting supply chains include:
- UK Floods (2013-2014) - The highest rainfall levels since 1910 have led to significant, prolonged flooding across the country. Businesses have been severely disrupted, and there has been substantial disruption to road and rail infrastructure. Damage such as the destruction of the main rail line to Devon and Cornwall will take months to repair, and some analysts have predicted costs of more than £1bn to the UK economy.
- European Floods (2013) - Significant rainfall in Eastern Europe had a major impact on manufacturing companies. Porsche was forced to temporarily close its factory in Germany, after floods in the Czech Republic halted the supply of Cayenne models from the VW plant where they are built in Bratislava.
- Hurricane Sandy (2012) - This hurricane was the most powerful and deadliest to hit the North Eastern Coast of the United States, causing over $68bn in damage to buildings and infrastructure. It prompted the worst fuel shortages in North America since the 1970s.
- Japanese Tsunami (2011) - The Tsunami brought long term disruption to global supply chains due to production at many factories being suspended as a result of flooding.
- Thailand Floods (2011) - Hi-tech supply chains were severely impacted by the floods in Thailand, which led to a shortage of key components within the computer industry. Over 1000 factories were affected and subsequent insurance claims reached $20bn. As a direct result of the floods, Thai GDP growth projections decreased from 2.6 per cent to 1 per cent.
Therefore, as many global economies begin to recover from a major economic downturn, it is in each country's interest to ensure that they are prepared when disaster strikes. Increasing supply chain resilience was one of the key themes at last year's World Economic Forum, and building this should be on every CEO's agenda, especially if they operate a truly global supply chain across manufacturing hubs located around the world.
But what exactly is resilience? Accenture's previously mentioned report states that resilience is: "the ability of a system to return to its original or desired state after being disturbed."
Consequently, with resilience now a top priority for supply chain directors, various operational based changes have been implemented to try and remove the potential for risk.
Examples include:
- Near shoring - also referred to as reverse globalisation, the term is used to describe a way of shortening logistics networks. Rises in wages in China and an increase in natural disasters have led many companies to consider relocating manufacturing capacity back to their home market. For example, Caterpillar moved production of its small bobcat excavator from Japan back to North America.
- Establish a global plant floor - this is a term coined by the analyst firm IDC, and describes how manufacturers are spreading production capacity to differing plants around the world. Therefore, if disaster strikes again and a manufacturing plant is taken offline, they can switch to an alternative to maintain production capacity.
- Dual sourcing strategies - constant disruption combined with a need to source from the Far East has meant many companies now implement dual sourcing strategies. This means that when disruption occurs across a supply chain, the manufacturing company can quickly switch to an alternative provider of components/parts.
Concerns also remain in relation to oil dependencies and increasing insurance and trade finance costs. This added to the impacts of natural disasters means more than 80 per cent of companies are now worried about supply chain resilience. Subsequently, risk management must be an explicit but integral part of supply chain governance, with Accenture who released the figures making these recommendations;
- Institutionalise a multi-stakeholder supply chain risk assessment process rooted in a broad based and neutral international body
- Mobilise international standards bodies to develop, harmonise and encourage the adoption of resilience standards
- Incentivise organisations to follow adaptable strategies to improve common resilience
- Expand the use of data sharing platforms for risk identification and responses
So far I have only covered risk management across the physical supply chain. As more traditional supply chains evolve into the digital market however, effective risk management will also need to include these areas.
As information is increasingly transmitted digitally, there is also a greater chance of cyber risks disrupting supply chains. Therefore, in addition to introducing operational based changes, supply chain directors should likewise look to improve their ICT infrastructures. If these are configured correctly they would provide significant resilience gains according to Accenture.
The corner stone of IT-based resilience is data and information sharing.
Business continuity is enabled through access to real time data, followed by rapid dissemination of data driven supply chain fixes. However, information sharing infrastructures depend on a resilient core network, appropriate communication tools and an element of redundancy. Combined, this requires an ICT infrastructure that is flexible, scalable, secure and re-routable.