Supply chain horror stories are becoming common, with high-impact events taking their toll on global lines of supply. But there is a much wider spectrum of potential disasters that would send investors running for safety, says Achilles' Dan Quinn.

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Chain reactions
June 2012
THIS MONTH'S EZINE
Supply chain horror stories are becoming common, with high-impact events
taking their toll on global lines of supply. But there is a much wider 10 tips: Buying office supplies
spectrum of potential disasters that would send investors running for (/ezine/features/10-tips-buying-office-supplies)
safety, says Dan Quinn.
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The far-reaching consequences of supply chain disruption, supplier failure and
damage caused to a brand through supplier malpractice are all too readily visible The top five purchasing myths
as horror stories in the press. These are incidents that undermine market (/ezine/features/top-five-purchasing-myths)
confidence and directly impact corporate profitability and shareholder value.
How to take intelligent risks in supply
The potential for such horrors to strike has increased dramatically in recent years management (/ezine/features/how-take-intelligent-
with the emergence of highly complex and greatly extended supply chains. Lines risks-supply-management)
of supply for all manner of goods and components traverse the globe within tight
time frames, with minimal inventory as back-up. Just-in-time processes keep Chain reactions (/ezine/features/chain-reactions)
supply chains lean, but such distances make them extremely vulnerable to
disruption. 10 tips: Buying office supplies
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A significant number of high-impact, low-probability ‘black swan’ events hit supply
chains in 2011, with the New Zealand earthquake, the Japanese tsunami and The mystery of the vanishing print spend
floods in Thailand. The Japanese tsunami in March caused huge disruption to (/ezine/features/mystery-vanishing-print-spend)
automotive and technology supply chains. Parts shortages from the Japan
earthquake impacted car production worldwide, costing hundreds of millions of
dollars in lost production for the sector. Floods in Thailand last autumn caused
further chaos when clusters of specialist hard disk drive manufacturers were
inundated, removing a third of global production capacity for a highly sought after
components for notebooks.
Corporations are becoming acutely aware of the impact such supply chain issues
have on the financial performance of the business. Reflecting this, findings from
research conducted by Achilles (http://www.achilles.com) and IFF Researc
(http://www.iffresearch.com) h into attitudes to supplier pre-qualification indicates that
CPOs regard a supplier’s ability to deliver in terms of quality, timeliness and cost
as their most important risk to manage. Some 75 per cent put it in their top three
risks.
But are events of this nature really so unlikely? Every year natural catastrophes
occur. Shouldn’t we be planning and mapping out our critical supply chains with
regards to their exposure to risk, both natural and otherwise? How aware are we
of the full spectrum of issues, particularly from our suppliers, which present
significant risk to our supply chains and company share value? What is clearly
needed is a more holistic view of supply chain risk.
High risk
http://www.ifpsm.org/ezine/features/chain-reactions 22/06/2012

2. Chain reactions | Global purchasing Page 2 of 3
Supply chain risk, with all its potential horrors, comes in a multitude of forms,
ranging from physical disruption due to natural disasters, transport failure or civil
unrest to the financial impact of a supplier going out of business or reputational
damage from a supplier using child labour or failing to comply with health and
safety standards. Then there are risks surrounding exposure to fraud, litigation
and corporate social responsibility issues.
The Achilles research reveals 43 per cent of businesses are aware of a high-risk
supplier failing to meet compliance requirements. In addition, 8 per cent of
organisations interviewed believe more than half of their suppliers are ‘high risk’ –
defined as suppliers whose ‘financial failure, failure to deliver or failure to comply
with relevant legislation or regulation would cause significant financial cost and/or
reputational damage’ to the buyer.
Interviews conducted as part of the research offer some interesting insights:
• A supplier was fraudulently identifying parts. They went to jail as a result.
Our company had to reaccredit our suppliers.”
• “We’ve had companies that have had a guy killed on the site. We stopped
dealing with them.”
• “The use of substandard labour by [supplier] caused damage to our brand
reputation.”
• “We use subcontractors a lot in the construction industry – and our supply
chain is international. In the past two years, it feels as if we’re just one
small step away from bankruptcy.”
• “Because we are a water company, quality is an issue. We could be sued if
something goes wrong – and then there is the problem of bad publicity.”
According to Nick Wildgoose, global supply chain proposition manager at Zurich
(http://www.zurich.co.uk) : “Research we did with the Business Continuity Institute
(http://www.thebci.org) last year found 85 per cent of companies had suffered some
kind of significant disruption in 2011. That wasn’t perhaps so surprising. But for
the first time, we looked at where this disruption was occurring and 40 per cent of
the disruptions were below tier one,” he says. “The focus of those few companies
taking the lead in this area is on tier one. Very few of them are tracking back
through the tiers – even for their most important components or their most
profitable products.”
Wildgoose poses two highly pertinent questions: what are your tier one suppliers
doing about their own supply chain resilience? And how are you checking that?
There are plenty of examples of companies whose reputation and brands have
been badly damaged by a supplier, or sub-supplier, being non-compliant with a
buying organisation’s corporate social responsibility (CSR) policies. Few outside
the retail sector consider the damage that may ensue from the discovery a boiler
suit used by a major oil company was produced using child labour, or that a hose
component sourced by an engineering company was manufactured under
appalling working conditions. No company can divorce itself from the errant
policies and practices of its suppliers. As those in the retail sector have
determined, ethical audits of suppliers is a necessary process for reducing
exposure to this potentially highly damaging source of risk. It is important that
other sectors, too, recognise the importance of monitoring suppliers in this way.
However, results of the Achilles research indicate 62 per cent of buyers seem
unconcerned about the risks suppliers present to the reputation of their business,
with only 38 per cent ranking it in their top three most important risks to manage.
Larger companies are more in tune with exposure to CSR issues, with 23 per
cent of those organisations with turnover between £250 million and £999 million,
putting their most important risk faced as managing their brand and reputation,
while smaller companies are more focused on financial risks.
Financial failure of a supplier has been a particular risk to the supply chain in
recent years. “The horrors in the chain can come from insolvency as much as
physical damage – particularly, when you go down the chain,” says WIldgoose.
“Often, companies are unaware of an important component coming from an SME
at a lower tier. It could be that the SME has a financial problem and is in danger
of collapse. So buyers need greater visibility of lower tiers and what’s happening
on those levels.”
The research confirms buyer anxiety regarding supplier finances. The report finds
that the second most concerning risk for buyers is that of a supplier going out of
business. Nearly half (48 per cent) were concerned about the financial failure of
suppliers’ businesses and put it in the top three risks they have to manage.
Although credit availability may be a little better than it was a year or two ago, the
financial security of many suppliers remains an open question.
Critical checks
If a supplier is vulnerable it is worth knowing about it in advance. That way an
alternative supplier may be sought, or if the supplier is a single source for a vital
component or service, action may be considered to help that supplier. Either way,
predictive financial tools and up-to-date credit ratings on suppliers is the only way
of reducing exposure to this very real risk.
Wildgoose advocates mapping out the critical supply chains to understand where
the key production sites and critical raw material sources are, so you can more
readily see your exposure to such risks as natural disasters or areas of potential
civil unrest. But he also emphasises the importance of checking less obvious
risks, such as those relating to intellectual property (IP). He says there are many
instances of companies negating to carry out simple checks on whether a
supplier has been involved in any issues surrounding IP infringement. A simple,
inexpensive check could save many millions of dollars.
http://www.ifpsm.org/ezine/features/chain-reactions 22/06/2012

3. Chain reactions | Global purchasing Page 3 of 3
Health and safety is another area where horror stories abound. Risk from
suppliers failing to be compliant on Health and Safety issues can have a hugely
damaging impact on a buying organisation’s reputation. And that is apart from the
great disruption, high costs and potential for litigation that can result from a
supplier’s actions, or lack of actions, at whatever tier. If a fatality occurs on the
buyer’s site, it is going to be the reputation of the buyer that suffers. Ensuring
that a high-risk supplier’s management processes relating to Health and Safety
are robust is critical to off-setting this potentially, highly damaging risk.
Mitigating the risks presented by suppliers is dependent on having accurate
supplier data. However, most CPOs are unaware of the poor state of their
databases and are consequently at great risk.
Whenever we work with companies across the globe, almost always the senior
managers of the procurement department have been shocked at the poor quality
of their own data, when they had believed it was significantly better than it really
was. Gaining a clear view of your supplier base, with access to pertinent
information that has been qualified, evaluated and monitored is absolutely
essential to avoiding the horrors that can, and regularly do, strike the supply
chain.
☛ Dan Quinn is new sector development director at Achilles (http://www.achilles.com)
http://www.ifpsm.org/ezine/features/chain-reactions 22/06/2012