Supply chain disruption costs. Here’s why more and more supply chain professionals are looking to monitor it.
Running a business is a volatile business. While uncertainty is always a large part of the game, supply chain disruption, one of the leading causes of business volatility, is something that more and more supply chain professionals are seeking to monitor and manage.
Insurer FM Global, for example, has a Global Resilience Index, a data-driven tool and repository that ranks the business resilience of 130 countries, and is designed to help executives evaluate and manage supply chain risk.
Nine key drivers of supply chain risk are grouped into three categories: economic, risk quality and supply chain factors. These combine to form the composite index. Scores are bound on a scale of 0 to 100 with 0 representing the lowest resilience and 100 being the highest resilience.
Canada’s current supply chain resilience ranking, for example, is number 16, with a score of 83.3.
Supply chain risk is not new, but it’s become a big topic of conversation in insurance circles, notes David Shillingford, SVP, Supply Chain Solutions at Verisk Analytics.
This is a result of the fact that supply chains have evolved to be more elongated, with the element of JIT delivery.
“If something goes wrong the impact is more severe,” he said.
“We struggle to understand the full extent of risk. The challenge for risk managers is having the visibility into the risk. Clients are most concerned about where the risk is to them (in terms of tiers, raw source suppliers).
It’s a significant undertaking to understand the links and nodes-even if you knew all that, to measure the risks at each node and develop a risk model at each is a challenge,” Shillingford added.
Understanding the full extent of the risks inherent in global or even domestic supply chains, at each level in the process, comes down to having the right models with the right scientific input.
The other two components are the data about the supply chain itself, about assets and where they are going, and about the risks.
“Supply chain managers are spending a massive amount of time and effort on getting a better idea of their supply chain. It’s a mammoth task. Increasingly there is better business justification for doing that, i.e. consumer demands for transparency, and different companies will be in various stages of visibility. Very few if any companies have ‘full visibility’ but there are ways to fill in the gaps. What will accelerate this is the ability to obtain data about their supply chain from outside the enterprise,” Shillingford said.
It’s no good covering political risk and not crime, when gathering risk data.
It’s important to cover all of the risks because they interact with each other. This can include anything from water scarcity to human rights issues-anything with a potential long term impact on supply chain.
It’s important to be able to come up with numerical and quantitative scores, then bring together risks and assets through modelling. Telematics and estimation help to see where things are in the supply chain.
“There’s definitely an awareness that this is something that needs to be done, and practically it is becoming possible-increasingly companies are collecting more of the supply chain data,” Shillingford said.
“From the risk data standpoint we have around 200 indices for different types of risk around the world. Where it starts to become meaningful is where we can overlay that with the client’s assets. The tool is providing guidance and results through predictive modelling-using this to quantify those risks and to predict them. We think of it as risk-adjusted optimization. Being lean is different from being optimized,” he added.
On the supply chain data side there are many tools supply chain managers can use to achieve visibility. The challenge they have is accessing the data.
“Modelling tools that offer a complete view of global risk, such as that of Verisk Maplecroft, create probablistic scores,” said Shillingford.
Resilinc, which offers a risk management and compliance platform called SupplyIntel, recently published its 2014 EventWatch supply chain disruption annual report, which summarizes and analyzes nearly 700 unique supply chain notifications and alerts generated by its EventWatch 24X7 global event monitoring and alert reporting service.
The email service provides early warnings and analysis of supply chain incidents that can negatively impact revenue, market share, customer satisfaction, and shareholder value, by risk type, industry, geography, severity, and seasonality.
The report also revealed the top five supply chain events of 2014, as driven by estimated aggregate revenue impact. The top 5 events were (1) Typhoon Halong in western Japan with a revenue impact of over (US) $10 billion, (2) Severe flooding in Long Island, New York with a revenue impact of over $4 billion, (3) Typhoon Rammasun in China and Vietnam with a revenue impact of over $1.5 billion, (4) the Taiwan gas explosions with a revenue impact of over $900 million, and (5) and the Intel hazardous chemical spill in Arizona with a revenue impact of over $900 million.
“This was a good year for supply chain events as there were no severe disruptions on the scale of the 2011 Thailand Floods, the 2011 Japan Earthquake and Tsunami or 2012’s Hurricane Sandy,” said Shazaib Khan, Resilinc EventWatch program manager. “It is important to keep in mind, however, that a common misstep that organizations make is placing too much emphasis on planning for the highest impact risks and disaster scenarios. Supply chain impact research indicates that smaller, more frequent disruptions are more costly in aggregate than those precipitated by high-impact, but infrequent events.”
The report also highlighted that for the second year in a row factory fires/explosions were the most common supply chain event followed by labour strikes and hurricanes/typhoons. The top three industries for supply chain events for 2013 and 2014 were automotive, high-tech and life sciences, and in 2014, the preponderance of supply chain events emanated from North America, followed by RoW (rest of the world) and Europe. 2014 was a less “eventful” year for Asia for which only 111 events were reported compared to 125 in 2013.
In conversation with Canadian Shipper, Bindiya Vakil, CEO & Founder, Resilinc Corporation, said that at any given point in time there are thousands of things going wrong in the supply chain arena, across hundreds of sites and suppliers.
“There are multiple interruptions during the year that don’t meet headlines. A lot of times these quality problems are not tied to large scale, catastrophic events. They could be preventive maintenance issues, shortages you have to resolve, tier one supplier effects.”
If these are managed by creating a “war room situation” sometimes you are bleeding through hundreds of thousands of dollars.
“We definitely see that a lot of the supply chain stakeholders, primarily from a sourcing standpoint, and with the proliferation of factories around the world, have, from the last 5-7 years, acknowledged that risk is a critical thing for them to manage. The other thing causing quite a lot of interest is customers that are expecting suppliers will take full ownership (of the risk) and provide customers with a better, more consistent service level,” Vakil said.
Tied back to competitive pressures, risk has become a board level initiative in many companies now, where usually it had been an enterprise risk.
“Now with the focus on supply chains disrupting business in a very material way we are seeing a lot of interest and pressure amongst chief supply chain operators. Some are identifying risk, and qualifying failure points on a quarterly basis,” she said.
Wayne Caccamo, chief marketing officer at Resilinc, noted that life cycles are so short for products so there is a long revenue based driver to optimize market opportunities, and to stay lean at the same time.
“So the better you can be at business contingency planning the better off you’re going to be,” he said.
“If you are overly lean because you don’t have a robust supply chain resiliency program you can’t sustain business in the long term,” added Vakil.
This year, Resilinc also created the Global Supply Chain Resiliency Council, a professional community and network for supply chain risk management practitioners, leaders, and stakeholders. Resilinc remains the technical advisor and principal sponsor with the idea that the Council will incorporate as a Not-for-Profit with a dedicated staff.
“We want to bring thought leaders together, to create opportunities for these people to collaborate, and to create a platform to recognize people, organizations, and best practices within the area.
These are the formative, guiding principles. We want to elevate supply chain resiliency as a discipline. Organizations can find networking, support, learn what worked and what didn’t. The key part of this is the rewards program-we talked about metrics. There’s no way for an organization that is excelling at a long term vision to be recognized for its efforts. There’s no award platform for what’s being done. We only recognize the people who ‘saved the day’ with a war room situation. We don’t reward the people who avoided the risk. We want the council to be pro-active on risk avoidance,” said Vakil.
“At the end of the day resiliency is a top down organizational initiative. The organization really has to embrace the concept, and that commitment happens at the highest level,” she added.
“While you really want that top down commitment, there’s lots of dimensions where you can plan a ‘crawl, walk’ evolution of your programs,” said Caccamo.
Resilinc’s recently-released white paper discusses the scoping of such programs.
“They may start with an upstream focus on risk management and then extend the focus downstream, i.e. mapping their tier one suppliers. There’s a way to justify a program to get started then to incrementally implement as you start to get success,” Caccamo said.
Julia Kuzeljevich is Editor of Canadian Shipper. She has been writing about transportation and logistics issues since 1999. All posts by Julia Kuzeljevich