Tuesday, February 25, 2014

Managing the Global Supply Chain Risk

“Supply chain risk has the greatest potential to disrupt top revenue drivers” (2008 FM Global Study). If you are in charge of financial management of a company such as Apple or Amazon, then the global supply chain risk has to be one of your biggest concerns.

Imagine an industry giant such as Apple or Microsoft. They supply to the global market, and have their resources stretched across the globe. Their operations affect and are affected by hundreds of companies across the supply chain. These multinationals have production orders assigned to companies in other parts of the world, which in turn rely on smaller companies to supply components and parts.

As far as supply chain management is concerned, businesses want to minimize costs while increasing productivity, get to market quicker without stockpiling inventory or tying up capital, increase efficiency in production and maintain quality control. This is becoming increasingly complex, as operations have become globalized. Parts of operations, such as production of certain raw materials, which are no longer cost-effective for the company to do themselves, are contracted out to other companies. By doing this, many companies build alliances and partnerships around the world.

However, as supply chains are extended globally, the risks associated with managing supply chain increase too. Not only do supply chain managers have to worry about the risks around them, but also the risks in the locations where their suppliers are based. As supply chains cross across borders and time zones, the system becomes more and more vulnerable. Any breaks in the supply chain can cause a collapse in the entire system. An earthquake in country A could cause all the power plants to malfunction, thereby disrupting all production in that region. A chemical plant spill in country B could cause all ports in that country to be shut down. The situation is direr for landlocked countries that rely on their neighbours to get access to the sea. This is true for many African countries where civil wars in neighbouring countries can halt all transport and logistics processes – a problem also known as the “bad neighbour trap”.

Global risks to the supply chain are becoming more and more unpredictable. Many multinational companies are increasingly being targeted by terrorist groups. In the Middle East, for instance, factories belonging to U.S. corporations are often attacked in an attempt to stir diplomatic tensions. Such events are extremely difficult to predict.

Imagine the devastation if an Apple’s production plant in China is destroyed by rebel groups, or even an earthquake or a fire for that matter: the company can expect hundreds of millions of dollars in losses caused by delays in delivery and loss of product. Sales would decline sharply and the company may lose a significant part of the market to its competitors. Revenues and operating profits would also drop. Market credibility and reputation would be damaged, causing investors and shareholders to leave, driving up the costs of capital.

The challenge is in recognizing and diverting a potential disruption in the supply chain, or being prepared to manage one, if and when it occurs. Managers who are aware of these risks and incorporate them in their supply chain management strategy are more flexible in dealing with these risks than those who do not. Managing global supply chain risks require an acute understanding of the entire supply chain network, the countries where suppliers or partners are based and the business and political risks present in those countries. The knowledge requirement for global supply chain managers goes beyond supply chain systems to international business, international relations, environmental politics and economics.

The potential for global supply chain risks need to be identified and assessed across the entire supply chain. Companies should develop an inclusive strategy with all its global suppliers and partners so that all business, political, economic and social risks are understood and properly managed.


PWC Transportation and Logistics 2030—Volumes 1-4, www.pwc.com/gx/en/transportationlogistics/tl2030/index.jhtml

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