Why companies are struggling to manage their supply chains

Companies are finding it increasingly difficult to control their supply chains at a time when the cost of failure is higher than ever, according to the risk management association Airmic. Firms are outsourcing not just production but also their reputation to suppliers without understanding how they operate or having adequate risk management strategies in place.

Speaking at the publication of a new report on supply chain failure, Airmic technical director Paul Hopkin said: "The relentless pressure to cut prices has led to the creation of supply chains of mind-boggling complexity and business models that no one properly understands. When you consider the speed with which information travels, boards should not be surprised when public relations disasters such as the horsemeat scandal take place."

The report, "Supply Chain Failures: A study of the nature, causes and complexity of supply chain disruptions"  was prepared for Airmic by Dr Alan Punter, who was involved in the preparation of the "Roads to Ruin" report in 2011. It found that businesses frequently have taken inadequate measures to protect their supply chains, that failures have become common and that many firms are ill-prepared to respond to them. It identified seven underlying factors that tend to be present whenever supply chains go wrong.

Off-shoring.  Firms now have an international network of suppliers and service providers, which can be all but impossible to monitor adequately.

Increasing complexity.  Firms may know their suppliers, but not those further down the chain. It is common for suppliers to sub-contract without informing their customers.

Cost pressures. Contractors feel under so much pressure to cut production costs that they compromise on quality, ethics and corporate responsibility.

Geographic clustering. The Japanese tsunami of 2011 highlighted the fact that many manufacturers had their main and back-up suppliers located in the same areas as each other. When one went they all went.

Modern communication. News travels so fast and is amplified by the social media such that bad news can wreck a reputation before there is time to react.

Modern production methods. 'Just in time' production has increased vulnerability and reduced the time to recover from supply chain failure.

Increasing dependency. The need to acquire components from many different sources increases vulnerability to supply chain failure. Boeing's commercial arm, for example, handles more than 750 million aircraft parts a year from 1,200 companies operating 5,400 factories.

"Firms that handle their supply chains successfully are those that take an enterprise-wide approach to business continuity and risk management," said Dr Punter. "The design, manufacturing, purchasing and risk management departments need to all work together."

Case studies examined during the research included the grounding of the Boeing 787 Dreamliner (2013), the Japanese earthquake and tsunami (2011), Thailand floods (2011), Nestlé's Kit Kat attacked by Greenpeace for using unsustainable supplies of palm oil (2010), Mattel recall of millions of toys (2007).

Some facts from the report:

• Economic losses from supply chain disruptions are estimated to have increased 465% between 2009 and 2011.

• The Allianz Risk Barometer (2013) ranked business interruption and supply chain as the top risk concern of businesses globally.

• Around two thirds of the cost structure of many companies is located in their supply chains.

• Companies that experience supply chain disruptions are estimated to experience on average a 10% reduction in sales and shareholder value.

• A study found that 90% of firms do not consider risk when outsourcing production.

• A Business Continuity Institute survey in 2011 reported that only 8% of respondents could confirm that all key suppliers had programmes in place to deal with disruptions.

• The main cause of supply chain disruptions is unplanned outages of IT and telecommunications at suppliers, with adverse weather in second place and outsourcer failure to provide services in third place.

The report was sponsored by Lockton and Allianz Global Corporate & Specialty.