Supply disruption risk levels are near record high
According to an index by the Chartered Institute of Purchasing and Supply (CIPS), risk levels within the global corporate supply chain are at record highs, as a result of increased political risk due to the turmoil in the Ukraine.
The institute warns that businesses must “recognise the risks to their supply chains and make the appropriate provisions before it is too late”. As reported by the Financial Times, the risk of disruption to corporate supply chains had shown signs of improvement before the Ukraine situation erupted, thanks to the recovery of the economies of the US, Germany and the UK.
The CIPS, who represent 100,000 purchasing and supply management professionals in 150 countries, indicated that its quarterly index currently stands at 79.8. This represents a near all-time high, tripling the 1994 reading - the year to which the index had been backdated. The economic crisis that broke out in 2008 exposed the corporate world to ‘greater risks than ever before’, stated the Financial Times in an article about the index. Factors assessed in the CIPS index include economic prospects, trade barriers, regulation, ease of transferring money, infrastructure quality, civil disorder and the danger of expropriation.
Most transnational corporations have contingency plans in place which tend to focus on minimizing the impact of time, distance, communication and other supply chain risks, but, forewarns CIPS, exposure to the most unstable regions in the world may lie, three or even four tiers down.
Various other risk analysts agree with CIPS when it points out that companies that have been been forced by the financial crisis to keep costs low and to save on inventory. To do so they must resort to just-in-time supply logistics might be inadequately mitigating against risk.
“The CFO, in collaboration with management, typically makes decisions to decrease inventory levels, rely on a single-source strategic supplier, and adopt just-in-time manufacturing and delivery techniques,” explain Christopher Monk and Jim Deloach, Managing Directors at Protiviti, in an article in SupplyDemandChain. “If the focus on supplier rationalization leads to extreme concentration, dependency and heavy emphasis on lean manufacturing leads to minimal buffers and tightly interconnected systems, disruption risk is further increased,” they warn.
Companies tend to be familiar with their tier one risks, because those are based on possible, knowable circumstances, for which back up suppliers are identified beforehand in case of mission critical parts, explain Barry Cross and Jason Bonin, two risk management experts, in the Ivey Business Journal. However, the risk factors upwards from tier one are less visible, and their consequences more severe. “In these cases, we often don’t know what we don’t know, so best practice is to have a set of standard practices in place to ensure a prompt, effective reaction to a supply situation when it arises.”
Considering second and possibly third-tier suppliers for strategic supply arrangements is something that corporations are making cost savings on, but the logistics in linking these vital elements of the supply base with the company’s operations are relatively unexplored. Which spells one word: risk. “The enterprise’s supplier relationships and the supporting supply network are just as important as its internal processes, personnel and systems because they are inextricably linked to what makes the business model work, albeit with less visibility”, say Christopher Monk and Jim Deloach.
Companies who are ahead of the game will have made some headway in assessing these invisible risks. Issues Monk and Deloach suggest corporations evaluate include whether they are going to take an end-to-end view of their supply chain when evaluating disruption risks, from second- or third-tier suppliers through customer fulfillment, or whether they will opt to focus on a smaller scope initially. Considering all relevant scenarios that could impede the supply chain of critical suppliers is vital, as well as knowing how resilient a company will be when it is faced with a disruption.