RiskOperational RiskReport Focuses on Supply Chain Challenges

Report Focuses on Supply Chain Challenges

Companies are finding it increasingly difficult to control their supply chains at a time when the cost of failure is higher than ever, according to the UK risk management association Airmic. Firms are outsourcing not just production but also their reputation to suppliers without understanding how they operate or having adequate risk management strategies in place.

Speaking at the publication of a report on supply chain failure sponsored by Lockton and Allianz Global Corporate & Specialty, Airmic’s technical director Paul Hopkin said: “The relentless pressure to cut prices has led to the creation of supply chains of mind-boggling complexity and business models that no one properly understands. When you consider the speed with which information travels, boards should not be surprised when public relations disasters such as the horsemeat scandal take place.” Earlier this year, some UK supermarkets hastily cleared their shelves of certain products found to contain horsemeat.

The report, entitled ‘Supply Chain Failures: A study of the nature, causes and complexity of supply chain disruptions’, was prepared for Airmic by Dr Alan Punter, who notes that economic losses from supply chain disruptions are estimated to have increased 465% between 2009 and 2011.

The report finds that businesses frequently have taken inadequate measures to protect their supply chains, that failures have become common and that many firms are ill-prepared to respond to them. It identified seven underlying factors that tend to be present whenever supply chains go wrong:

  • Off-shoring.  Firms now have an international network of suppliers and service providers, which can be all but impossible to monitor adequately.
  • Increasing complexity. Firms may know their suppliers, but not those further down the chain. It is common for suppliers to sub-contract without informing their customers.
  • Cost pressures. Contractors feel under so much pressure to cut production costs that they compromise on quality, ethics and corporate responsibility.
  • Geographic clustering. The Japanese tsunami of 2011 highlighted the fact that many manufacturers had their main and back-up suppliers located in the same areas as each other. When one went they all went.
  • Modern communication. News travels so fast and is amplified by the social media such that bad news can wreck a reputation before there is time to react.
  • Modern production methods. ‘Just in time’ production has increased vulnerability and reduced the time to recover from supply chain failure.
  • Increasing  dependency. The need to acquire components from many different sources increases vulnerability to supply chain failure. Boeing’s commercial arm, for example, handles more than 750 million aircraft parts a year from 1,200 companies operating 5,400 factories.

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