The devastation that ash clouds, earthquakes and tsumanis have had on global supply chains over the past couple of years has served as a reminder of just how vulnerable organisations remain to unexpected disruptions.
The increasingly global nature of supply bases, alongside the continued quest for efficiency, has heightened exposure to both natural disasters and local turbulence, which can have a disproportionate impact on a company’s ability to manufacture components and sell finished products. “If you have modular manufacturing, then it doesn’t matter if your own factory is still standing or not because you still might not be able to get supply,” says Michael Bernon, director of executive development within logistics and supply chain at Cranfield School of Management.
Other trends are also converging which are increasing the potential of supply disruption to global models, he says, including the growing importance to Chinese manufacturers of their own domestic market compared to Western countries.
As a result, there is currently a small but emerging trend for organisations to reconsider local sourcing, partly because of the environmental and sustainability benefits, but also because it increasingly makes economic sense.
Increasingly, it’s supply chains that compete, not just companies
“The longer your supply chain is, the longer lead time you have and the higher exposure to forecast errors, so you have to have a huge amount of safety stock,” says Mr Bernon. “Then there are other factors; once the price of oil goes up, the equations change. For some products it might be worth making items back in the domestic market.”
Pierre Mercier, partner and managing director at Boston Consulting, says while inventory buffers can cope with small disruptions that arise from a global supply chain – such as stormy weather on the high seas adding a day or two to transit times for container ships – organisations need to develop strategies to cope with higher-impact events, such as the failure of a supplier or a fire in a distribution centre.
“Some events can build up over a long period and thus be somewhat predicted, such as geopolitical risks, hyperinflation or financial downgrades,” he says. Just by understanding the potential impact of such a disruption and training teams to react appropriately, organisations can go some way towards mitigating the impact, he adds.
Other organisations are looking even further into the future to ensure continued supply in an increasingly resource-constrained world. Chinese businesses are investing in natural resources in Africa, says Mr Bernon, while drinks manufacturers and tobacco companies are watermapping the globe to identify where to base operations.
“It’s a real battleground,” he says. “You could imagine some vertical integration, which is interesting because until recently we’ve been talking about virtual supply chains where you outsource everything. Increasingly, it’s supply chains that compete, not just companies.”
Organisations also have much work to do to improve predictability on the demand side. The retail sector is a good example of this, says Steve Wall, managing director of The Sequoia Partnership. “Although shoppers buy pretty much the same things week in, week out, suppliers find enormous variability in the orders that are placed on them,” he says. “They then amplify this by passing it back to their suppliers.”
From a logistics perspective, online operations and the re-emergence of convenience stores are causing particular headaches for retailers, says Mr Wall, with modern supply chains designed to cope with pallet quantities heading for large supermarkets or hypermarkets. The emergence of a new model using centralised singles packing – pioneered by the likes of Ocado – is helping retailers better manage demand volatility, he adds, enabling peaks and troughs to be aggregated at a national or regional level.
The quest for predictability and security of supply in the face of volatility will always need to be balanced against the increasing demands for ruthless efficiency. It is, however, a constantly moving equation and one on which the majority of organisations still have considerable progress to make.
The devastation that ash clouds, earthquakes and tsumanis have had on global supply chains over the past couple of years has served as a reminder of just how vulnerable organisations remain to unexpected disruptions.
