Supply Chain Resilience

The 2006 Tsunami had a significant knock on effect on the spare parts availability for gear boxes for a major Japanese car manufacturer and underlined a need to understand the importance of supply chain resilieince. Even though deploying a dual sourcing strategy for the gear boxes, key components of the gear box were actually produced at the same facility close to the proximity of the doomed Fukushima nuclear power station.

Closer to home, the eruption of Eyjafjallajökull in 2010 closed the European Airspace for only 5 days and caused a significant amount of havoc in Europe and disrupted many supply chains relying on parcel airfreight or air cargo.

Still nearer, the Buncefield Depot exploding in 2005 caused closure of the M1 and M10 motorways, resulted in fuel rationing at Heathrow Airport and requiring long-haul flights flying from Heathrow landing at Stansted to refuel before flying on to the Far East, Australia and South Africa.

A number of companies in the vicinity where severely impacted, such as Northgate Information Solutions.

Northgate, as a major IT provider, were well equipped to deal with the inevitable fallout and had a disaster recovery plan in place – allowing them to react swiftly and effectively. Other companies in the area fared less well and many local companies complained of long term effects to their business, with many taking years to recover fully.

All of these examples are based on large external influences, which many companies regard as force-majeure and therefore not necessary to really worry about and therefore plan for. However, a fire in 2000 in Mexico at their manufacturing plant caused Ericsson phone production to halt and resulting in a joint venture with Sony in 2001 to ensure survival of the company.

Various studies have shown that companies who don’t plan take at least 5 to 7 years to recover fully and many don’t recover at all (and that assumes they survive the initial disaster in first place).

It is not only the initial loss in revenue, but the long-term loss in goodwill from  customers who have switched to different products, service providers and brands, but also the effort needed which is usually 12 to 18 months to get back to pre-disaster revenue levels. Unsurprisingly, the unscathed competition is more than happy to pick up this shortfall and moves forward, usually staying ahead and benefitting from this for 5 to 7 years.

But it’s not only natural disasters that can cause companies supply chain issues. Social media, global news coverage can make relatively minor events become major news, such as the press finding out that children are employed to sew together leather footballs and football kit in some back street in Pakistan Bangladesh.

The challenge here is that companies often only know who their first level suppliers are and often rely on them to “audit” their second tier suppliers. This is passed down the chain until the smallest supplier subcontracts the work out for a few pennies a day to some child labour or to a factory which would fail any form of safety inspection or minimum standard (and not necessary even the local standard) which is all very damaging to a company’s reputation.

However, we often hear, it is impossible to audit everything and fully understand all of the various global supply chains – the effort and cost is just too high to even just audit the supply chains. Further excuses often used – the costs are too high, the risk is remote and consumers are not willing to pay for it. This can result in a complacency culture –that is until a major event happens!

So what can be done? – The Logistics Business has a structured analytical approach to identify the key supply chain risks and issues. The approach investigates the organisation, looking at product flows, infrastructure, processes and IT.  Within the organisation, the risk is assessed by understanding the level or risk and the level of impact it has. For key risks, especially where a single point of failure can be identified, jointly with the customer the cost of failure and the avoidance cost are estimated.

This initial assessment helps customers to understand what the risks are and what it would cost to put an alternative in place. As with all supply chain resilience reviews, not all risks can be mitigated, as the cost would be prohibitive. However, it does allow the company to put focused recovery plans in place to minimise the risk as much as possible.

With a recent customer, The Logistics Business identified that a number of critical SKU’s for a manufacturing process were kept in a single location. A minor interruption will have cost the company around £150,000 per week due to production stoppage and based on current supply chain at least 4 weeks before production could restart. The mitigation strategy was an agreement with the supplier to hold reserve stock in a third party location in Holland.

An extended assessment looked at the supplier base and working closely with the customer, the key product flows are mapped and understood. The priority is set for the key revenue streams and on streams which are critical to the business. The suppliers are audited initially via a detailed questionnaire. The output is mapped out and key areas of risk are identified – both in geography and common nodes. Based on the output a third level assessment can be done – however in most cases a full understanding of the 2nd level sourcing is sufficient.

The risks again are quantified and a cost of the rectification strategy is established, allowing an informed approach to make an informed decision of whether to;

  • Carry the risk without mitigation
  • Carry the risk with a recovery approach in place
  • Mitigate the risk by redesigning the supply chain

A recent example here; the supplier was entirely dependant on a specific technical yarn, which when investigating the supply chain in detail came, regardless of supplier, from the same factory in Norway. An interruption in Norway therefore, would have resulted in a reduced production of 75% product for the customer, this information resulted in an R&D program to look for suitable alternative yarns and ability to produce the product but at a slightly higher cost – but to the same high quality should this event arise.

Our experience is companies spend too little time understanding their supply chains and how they are often linked either through product and/or sources. Often a short assessment over a period of six to eight weeks, and a structured action plan allows companies to build more resilient supply chains.

And what recent events have shown us, ad-hoc events and uncertainty are on the increase, resulting in a more volatile nature in our day-to-day business. And those companies not facing this head-on are likely to suffer catastrophic consequences.