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Supply Chain Resilience


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How are Global Businesses Doing?

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Supply Chain Resilience

  1. 1. Supply Chain Resilience: How are Global Businesses Doing? A UPS white paper developed in cooperation with the Economist Intelligence Unit
  2. 2. Table of Contents Preface ................................................................3 Foreword .............................................................4 Executive Summary .............................................5 Research Report ..................................................7 Introduction ....................................................... 7 An issue in need of attention ............................ 7 Current resilience strategies ............................ 11 Sustainability ................................................... 14 Resilience in action ......................................... 15 Conclusion ....................................................... 17 Is the C-Suite whistling in the dark? ..................18 IDS Group provides a global perspective from Asia ........................................19 Appendix A: Survey Results ...............................20 Appendix B: Advisory Board Participants ...........30 Appendix C: Qualitative Interviews ....................31
  3. 3. Preface Supply Chain Resilience: How are Global Businesses Doing? is a UPS report developed in cooperation with the Economist Intelligence Unit (EIU). The findings and views expressed in this report are drawn from three research initiatives: an advisory board meeting, a global online survey, and individual interviews. On Tuesday, April 22nd, 2008, the EIU organized an advisory board meeting in London consisting of senior executives with supply chain expertise. The discussion formed the basis for an online survey used to gauge supply chain resilience among global businesses. The quantitative findings presented in this report are based on the global online survey of 344 senior execu- tives – over half C-level and above – conducted by the EIU in June, 2008. The survey asked respondents about the key evolving risks in a global supply environment, and the strategies for resilience in the face of them. To supplement the quantitative survey results, the EIU also conducted individual interviews with senior execu- tives and experts in supply chain management. The report was written in cooperation with the Econo- mist Intelligence Unit: Kim Andreasson was the editor and project manager and Dr. Paul Kielstra was the writer. Our thanks are due to all advisory board participants, survey respondents, and interviewees for their time and insights. 3
  4. 4. Foreword Today’s complex global supply chains are at the heart of business strategy, driving bottom-line and top-line growth, and creating competitive differentiation for companies. But they are also fraught with risks, in- cluding product quality concerns, competitive issues, supplier continuity, natural disasters and rising energy costs, to name just a few. Across industries, businesses are vulnerable to supply chain disruptions that can move a company from leader to laggard in a relatively short period of time. The companies that will succeed in the global economy are those that develop successful risk mitigation strategies, and who use resilience as a com- petitive advantage. To help understand how companies are managing their global supply chains in this environment, UPS, in cooperation with the Economist Intelligence Unit, has completed a research program that culminates in the following white paper, entitled “Supply Chain Resilience: How are Global Businesses Doing?” As the research indicates, companies differ in their assessment of supply chain risks and management of resilience strategies. Although many companies are taking sensible precau- tions, there is still much work to be done to ensure that risk is addressed and competitive advantage maintained. Dan Brutto I trust this document will provide compelling insight into President, International this important issue. UPS 4
  5. 5. Executive Summary Global supply chains are the norm for today’s chains “are more vulnerable. From a company point businesses, both large and small. They allow compa- of view, this is disconcerting.” In the survey, 47% of nies to source flexibly from a vast network of suppliers. companies say they need to pay more attention to Their scope and complexity, though, often make them resilience – against 16% who disagree – and 42% brittle, increasing the odds that a glitch will cascade think that they have globalized their supply chains through the network – with dire results for a company’s faster than risk management can keep up. finances, stock price, or brand equity. For example, it • Insufficient monitoring, risk assessment, and took years for the market share of companies like Apple contingency planning are leaving companies and Adidas to recover from supply chain problems. ill-prepared when crises hit. One in 10 More striking, in the 1990s, such issues pushed US companies do not monitor suppliers for drug distributor Foxmeyer, a company with $5 billion in anything. About half of the rest look only at “Having quick information, and annual sales, into bankruptcy. Building a resilient supply immediate – so-called Tier 1 – suppliers. The chain is critical to corporate success. quality of such assessments varies, some- understanding the dynamics of This UPS report, written in cooperation with the Econo- times not rising above cursory box checking. the supply chain is absolutely mist Intelligence Unit, seeks to go beyond a collection Among the 45% of companies where the of anecdotes in assessing the progress of companies in respondents knew the answer, formal risk critical for resilience.” developing more resilient supply chains and examining assessment takes place only annually or less the state of best practices. It is based on the quantitative frequently. Just half of companies seek to learn from findings from a global online survey of 344 senior execu- their own supply chain breakdowns, while a minority tives – over half C-level and above – as well as in-depth uses other means to improve resilience. Given that an interviews with business leaders and other experts in the understanding of the dynamics of the supply chain is field. Key findings include: absolutely critical for resilience, this leaves too many • Rising risks to supply chain resilience are too often firms open to unanticipated dangers. ignored in the rush of day to day business, and • A significant minority of businesses are falling back companies know it. Professor Yossi Sheffi, Director of on increased inventory to address resilience prob- the Massachusetts Institute of Technology Center for lems, an expensive and ineffective approach. Four Transportation and Logistics, says that today’s supply in 10 respondents expect their firms to hold addi- 5
  6. 6. tional safety stock, ie to increase resilience through ways to get burned by not paying attention and step- higher inventory levels. And 38% plan to raise in- ping on emerging social norms.” Addressing these ventory even more in the coming years. Sometimes issues need not mean simply spending more defen- such increases may be needed to address specific sively. With creative thinking, according to issues. However, using excess inventory to address bigger resilience issues is an “expensive and lazy” Dr. Gopal Iyengar, Director of the Kirloskar Insititute of Advanced Management Studies, “With creative thinking, the approach, says Rolls-Royce EVP of Supply Chain near Bangalore, India, the “supply chain can supply chain can shift a risk Development, Steve Churchhouse. shift a risk into an opportunity.” • Relationship building, multi-sourcing, and near- • Low-cost countries are not magic lands into an opportunity.” sourcing to enhance resilience are likely to be- of plenty: sourcing from them without at- come part of best practice in the future. Most firms tention to supply chain resilience leads to value good supplier relationships as a way of guar- potentially expensive failure. Ten percent of those anteeing access to high-quality supplies. They are surveyed intend to reduce sourcing from low-cost not looking for exclusive ties but for solid links with countries (although far more intend to increase it). a variety of firms. Choosing partners from a range In fact, roughly half of all survey respondents said of countries to mitigate geopolitical risk, as well as low-cost sourcing had posed significant problems, to ensure that short lead times are available from such as the quality received from such suppliers and some suppliers, are sensible ways to maximize the even their ability to deliver goods as promised. benefits of the current wisdom. “Don’t put all your • The keys to successful sourcing from low-cost eggs in one basket, and definitely not in a basket on countries are like those of supply chain resilience the other side of the world,” says Mr. Churchhouse. in general: understand the issues, structure the • Sustainability is not just a trendy PR requirement: supply chain appropriately, monitor performance social and environmental risks to a resilient supply and work with suppliers to improve operations. chain are significant, but receive too little atten- As Doug Gurr, ASDA’s Executive Director, Strategy tion. Some 46% of firms admit they need to do more and Logistics, advises, “some of the best manufac- to integrate sustainability into their supply chains, turing in the world is in low-cost countries at the and environmental and social issues are currently moment... The way to do it is to get on the airplane the least-embraced area of supply chain monitoring. and have people out there.” Professor Sheffi warns that “there are all kinds of 6
  7. 7. Research Report Introduction Companies compete fiercely in finding the best sourcing We live in a global marketplace. It is not news, but it solutions. Four in ten respondents list competition as a is critical for understanding how businesses are meet- leading supply chain risk they face, and 58% complained ing – or failing to meet – the challenges of supply chain that it is somewhat or very difficult to find high-quality resilience. To give just one example, only about a third suppliers. To some extent this has always been the case; of companies overall, and just a quarter of large ones the difference today is the scale of the competition. A – those with annual revenues of $5 billion or more – more complex issue – and one that many firms admit source primarily from domestic markets. If anything, this they are not paying sufficient attention to – is resilience. trend is accelerating: 48% of survey respondents expect to increase the level of least-cost country sourcing in An issue in need of attention the next five years. Moreover, 35% expect to increase Long lines of trucks at the Canada-US border after 9-11; purchasing from China alone, and 29% from India. the specter of fuel shortages after Hurricane Katrina destroyed a substantial portion of America’s refining What was once a strategic choice is now a necessity. capacity; the triumph of Nokia over Ericsson when the “You’ve got to be over there [in Asia],” says Peter Con- former responded with greater agility to a fire at nelly, CPO of Leggett & Platt, a diversified manufacturer a mutual supplier’s New Mexico facility; pets and and Fortune 500 company headquartered in Missouri, livestock dying from melanin-tainted food across “It is hard to compete when you referring to the company’s sourcing strategy. He adds that in certain developing countries “it’s tough to do busi- North America in 2007: these are the oft-repeated don’t run lean, but you open cautionary tales of how the unexpected can de- ness, but in some cases it is getting to be one of the only bilitate a supply chain. Although only the biggest yourself up to expensive risks in games in town.” Indeed, a global supply chain is impos- sible to avoid, even if a company wants to source do- stories make the news, such challenges are a part the long run.” of normal business. As Steve Churchhouse, EVP mestically. One interviewee noted that quality concerns Supply Chain Development at power systems provider had made his colleagues reluctant to purchase from a Rolls-Royce, explains “we’ve experienced a number of particular Chinese firm, only to find that their current significant challenges because of acts of God, fires, and supplier was selling them goods manufactured by that earthquakes. When you have several hundred suppliers very company. “Whether or not we are doing developing across the world, occasionally a facility burns down or is world sourcing, our suppliers are,” says the executive. flooded.” As the earlier examples also show, terrorism, 7
  8. 8. natural disaster, accident, and fraud can hit a nation like by 53%), competition (40%) and supplier disruption the United States as much as low-cost countries with (36%). Second are the more difficult to quantify risks, notoriously creaky infrastructure. that arise from operating on a global level. The leading In the face of such well-known dangers, however, many concerns of over a quarter of companies include either businesses worry that they are not doing enough: geopolitical instability or terrorism, and over one in eight mentions natural disasters. • 47% of survey respondents believe that they need to pay more attention to resilience (versus just 16% But companies appear to be spending too little time in who say they pay an adequate amount of attention); assessing what problems might arise. About one in ten companies do no monitoring at all, and 42% look only • 42% of companies say that they have globalized at their own immediate suppliers. A mere 20% try to their supply chains faster than risk management can keep watch on their entire supply chain. Moreover, this keep up, against 27% who disagree; and, • only 38% consider their supply chain resilience above average, the aspect of supply chain man- Do you agree or disagree with the following statements as they relate to your company? agement which scored the second-lowest result to My company supply chain has globalized faster than our risk management structures the question. have been able to adapt to the U.S. economic slowdown Professor Yossi Sheffi, Director of the Massachusetts 13% 29% 26% 16% 11% 5% Institute of Technology Center for Transportation and My company needs to do more to integrate social and environmental considerations Logistics, explains that companies “are getting more into our supply chain vulnerable. Less inventory, tighter and leaner supply 14% 32% 25% 20% 7% 1% chains, by nature are more vulnerable. From a com- One of my company’s big sustainability challenges is from activists and consumers who do not actually understand the sustainability impact of what they are demanding pany point of view, this is disconcerting. It is hard to 9% 20% 25% 22% 19% 5% compete when you don’t run lean, but you open your- My company is re-assessing its sourcing based on geographic location rather than what self up to expensive risks in the long run.” is cheapest 6% 25% 27% 24% 14% 4% The challenges vary by company, but can be divided into two types. First are the known risks, on which My company needs to pay more attention to supply chain resilience many companies focus. When asked for their three 13% 34% 31% 12% 4% 5% leading supply chain risks, respondents’ top replies included traditional items such as energy costs (cited n 1 Strongly agree n2 n3 n4 n 5 Strongly disagree n Don’t know 8 0 20 40 60 80 100
  9. 9. monitoring tends to focus on product quality – an How closely does your company monitor its suppliers? important issue – but not resilience: only 35% of companies place the latter in the two leading fields which they examine. Finally, monitoring n Monitor immediate (Tier 1) 9% suppliers only (rely on them to programs are most often governed at the national 9% monitor their suppliers) or at best regional levels (37% and 29% of com- n Monitor immediate (Tier 1) suppliers panies respectively) rather than globally (32%), 42% and their immediate suppliers which makes it more difficult for them to feed into 20% n Monitor the entire supply chain a comprehensive understanding of global resil- ience issues. n Do not monitor Worse still, the limited activity that does occur can n Don’t know 20% be spotty. According to Professor Sheffi, the quality “varies significantly. If there is something on the checklist, somebody will check it and say we do panies as well. To overcome the difficulties, and maxi- a once-a-year audit. This is the main difference between mize the benefits of expending resources in this field, companies: those that monitor to check off a box and he suggests that, rather than focusing mechanistically those where it is ingrained in the culture.” He adds that on particular supply chain levels, “one needs to look cursory checks are not enough: “the trick is to interview at which points add real value. It doesn’t matter which your suppliers.” tier.” Monitoring at these key points will give companies Mr. Connelly of Leggett & Platt agrees on the impor- in-depth knowledge in the most crucial areas of the sup- tance of going in person – his company visits its largest ply chain. suppliers – but there are limits: “if you send somebody The information gleaned from monitoring should be to every supplier, you can’t afford it.” Professor Sheffi fed into processes to promote a stronger supply chain. also notes that beyond second tier suppliers, “companies This is not always the case. “A better understanding of have no leverage. It gets very dispersed and diffused. risk assessment strategies is a starting point in dealing In many cases there is no data; companies don’t know.” with resilience and globalization,” says Dr. Iyengar. But, Dr. Gopal Iyengar, Director of the Kirloskar Insititute of he continues, “quite often supply chains do not have a Advanced Management Studies, adds that suppliers can strong framework for this.” The survey supports his view. be stifled by excessive monitoring from too many com- Of respondents who knew the answer, just under a third 9
  10. 10. engage in formal supply chain risk management exercis- “there seems a world of difference between what you es only once a year and about 10% never bother at all. can simulate and what goes wrong.” For him, the key The situation is unlikely to improve: just 9% list improve- is having in place “people who’ve been there and done ment of risk mitigation practices as their leading supply that. Planning is great, but when you do have a problem, chain priority over the next five years, the least popular your ability to manage your way out is 90% down to the choice to the question. ability of the people on the ground to deal with it.” Even with the best intelligence, things will go wrong. And again too few companies are actively preparing Which of the following steps is your company taking to improve its supply for the worst. Only 51% benchmark their own supply chain resilience to potential crisis? Select all that apply. chain breakdowns for lessons learned and a mere 29% Internal benchmarking of supply chain 51% seek to gain knowledge from the mistakes of others, breakdowns and lessons learned both obvious things to do and relatively inexpensive as Hold additional safety stock 40% the costly mistakes being studied have already oc- curred. Going further, just 20% do crisis simulations. Do joint planning with channel partners on such a situation 31% The interviews suggest that these tend to occur in industries with a tradition of holding such exercises External benchmarking of supply chain 29% breakdowns and lessons learned for other reasons, such as safety. And executives differ on their utility. On the one hand, Mr. Churchhouse Conduct crisis simulation exercises 20% at Rolls-Royce, which uses them extensively, says “How do you value business continuity? If you want Collaborate with local governments on contingency planning 16% the highest level, you need to run live exercises.” He acknowledges that “they are very difficult and time Collaborate with competitor firms 16% consuming. It costs real money,” but adds that it is “all very well to have a plan written down, but you need Other 4% to do a drill [to know if it will work].” 0 10 20 30 40 50 60 On the other hand, Doug Gurr, Executive Director, In either case, although disagreeing on the means, the Strategy and Logistics at the retailer ASDA, says that his goal is to have tested people and processes available in company’s sophisticated crisis management structure a crisis. This takes conscious effort. Only a minority of does extensive planning but few simulations because companies are working toward this goal. 10
  11. 11. Current resilience strategies Relationship building: About 56% of respondents place Companies know that they are not doing enough on sup- a high importance on building lasting, solid relationships ply chain resilience. They are not, however, ignoring the as the best way to maintain the quality of their supply issue completely, but some of the techniques they are chains, and a further 38% think it is moderately impor- using are problematic. Inventory: In the future, 40% of companies expect Over the next five years, how do you expect your to hold additional inventory – so-called safety company’s inventory levels to change? stock – to increase their supply chain resilience. And 38% intend to increase inventory levels more n Increase greatly 5% 11% broadly. In very specific circumstances, this may n Increase slightly 18% be important to resilience. “If it is a critical item n Stay roughly the same that only one supplier makes, the only solution 27% n Decrease is to have plenty of inventory around,” notes Mr. n Don’t know Connelly. According to Mr. Churchhouse, holding an appropriate level of extra supplies at the right level in the supply chain to mitigate against a “likely 40% disturbance” is sound strategy. In general, however, the effectiveness of increasing supplies is limited. The economics driving inven- tory reductions have not changed. Professor Sheffi says tant. In the Asia-Pacific region, where a larger number that “holding more inventory is good for small disrup- of developing economies have sometimes unpredictable tions. When you talk about resilience, it is not these legal environments, the equivalent figures are 66% fluctuations: it is ‘how am I going to bounce back from and 34%. the things that can endanger my company’s survival?’ This may seem at odds with the image of companies A little more inventory doesn’t cover this.” Mr. Gurr constantly seeking the best deals worldwide, but it agrees: inventory is expensive, and although “it feels makes sound business sense. Indeed, in some cases, comfortable, it just doesn’t work” in enhancing reliabil- trustworthy relationships are not just desirable but ity. Mr. Churchhouse goes even further: using excess critical. In Mr. Connelly’s experience, for certain com- inventory to address bigger resilience issues is simply modities, if a company “shops price, you can’t get the “an expensive and lazy approach.” 11
  12. 12. product. We’ve had barges in the port with our name on animals to the company’s specifications which “makes a them and never got the steel.” massive difference to production costs and quality. It is This emphasis should not be misconstrued. Companies worth our while to pay a premium.” For reliability and do not want to get married so much as to have a lot of resilience in this type of sourcing, “the thing we have very good friends. Six in ten firms expect their pool of found key is getting people tied into a long term rela- high-quality suppliers to grow in the next five years: only tionship,” Mr. Gurr says. 12% foresee a decrease. Mr. Connelly says that Leggett & Platt, although reducing the Over the next five years, how do you expect your potential total number of suppliers overall for other pool of high-quality manufacturing suppliers to change? strategic reasons, still aims to have three for each important input, rewarding the best n Increase greatly 12% 10% value producer with the lion’s share of pur- n Increase somewhat chases. For him, the key to making this work n Neither increase nor decrease well is transparency with all involved, which n Decrease somewhat fosters competition. 26% 51% Decrease greatly 0% Professor Sheffi goes further. He notes that, while analysts tend now to “exalt” the just- in-time, lean supply chains often associated with Toyota, they forget that these require a very specific cultural environment to work. “Having a single supplier without mutual respect and trust is dangerous.” Multi-sourcing, near-sourcing and supply chain structure: In enhancing resilience it is not only the Relationships do have costs, but companies believe that number of suppliers that matters, but also their locations. the benefits outweigh them. Mr. Churchhouse notes that Half of survey respondents expect to engage more in Rolls-Royce has “moved quite determinedly in the direc- multi-sourcing – consciously purchasing from suppliers tion of dual sourcing for critical components” in order in multiple geographies. Although slightly less popu- to increase resilience, sacrificing some of the potential lar, near-sourcing (purchasing inputs from companies leverage of having a single source. Mr. Gurr points to closer to the final consumer) will also grow: 35% plan ASDA’s Lamb Link program. It pays farmers extra to raise to deploy it more, against just 16% who will do it less. 12
  13. 13. More broadly, 31% of companies are reas- Over the next five years, how will your company’s supply chain sessing their sourcing based on geography strategy change in the following areas? rather than pure cost, a figure which rises to 45% in North America. 1% Least-cost country sourcing n 1 Increase greatly Although conceptually different, both 13% 35% 34% 9% 7% n2 strategies can help answer the same 3% Near sourcing n3 question: how to maximize the benefits 7% 28% 42% 13% 8% n4 of having a good relationship with several Multi-sourcing strategy 1% n 5 Decrease greatly suppliers. If dual sourcing makes sound 12% 38% 32% 7% 8% n Don’t know business sense, then having suppliers from different parts of the world to reduce geo- In-house manufacturing political or environmental risk makes even 5% 14% 30% 23% 16% 11% more sense. Mr. Connelly, for example, says that although Leggett & Platt is increasing its presence in China – for both than a partial liability. According to Mr. Churchhouse, sourcing and sales considerations – it is also looking to Rolls-Royce’s efforts in this area have involved “looking 40 60 80 100 120 Vietnam and Indonesia “as a backup to China, partly to across all of our processes, internal and external, in order balance risk.” Similarly, Mr. Churchhouse advises, “don’t to make them more capable.” ASDA has built the major- put all your eggs in one basket, and definitely not in a ity of its warehousing as identical, cookie cutter mirror basket on the other side of the world.” Mr. Gurr, mean- sites that can take over for other locations that go down. while, sees near-sourcing as a way to overcome the Mr. Gurr says it is difficult to afford “redundant infrastruc- problem of lead time with global sourcing. For example, ture, but you can build the supply chain in a way that while a European firm could get its supplies of certain you can use other parts if some fail, and so that there are goods from India or China, it could also be useful to have people to call on if you have to scramble.” a secondary supplier in Eastern Europe in order to be able to respond quickly to consumer demand, such as for fashion or Christmas season toys. Such thinking can be part of a broader approach to sup- ply chain resilience which turns it into an asset rather 13
  14. 14. Sustainability Enhancing sustainability, however, will require the kind Although building a range of strong relationships and of attention to and monitoring of both suppliers and purchasing from a variety of sources bolsters continuity, global conditions that many companies are failing to do. it does not fully address the underlying (and often poorly Inattention can damage reputations. ASDA’s Mr. Gurr monitored) risks of global sourcing. A case in point is considers the need to engage in ethical sourcing one how firms are dealing with the issue of sustainability in of key new global supply chain challenges. If you do their supply chains. not know what is happening among suppliers, “you can get caught out.” Similarly, Professor Sheffi notes that Regulators, consumers, and investors are increasingly “there are all kinds of ways to get burned by not paying demanding that corporate activity yield positive environ- attention and stepping on emerging social norms. For mental and social outcomes as well as financial profits. Firms are only begin- Over the next five years, which will be the key focus for your ning to address supply chains in this company’s supply chain? context. Environmental impact and em- ployment conditions, for example, are n Cost containment/reduction 9% the two least closely monitored areas, n Long-term sustainability cited as leading concerns by only 9% 10% 28% (economic, social, environmental) and 6% of survey respondents respec- n Process innovation tively. And businesses realize that they 16% n Technology innovation are not doing enough in this regard: n Inventory optimization 46% believe they must do more to 19% integrate sustainability into the supply n Improving risk mitigation practices 18% chain, against just 27% who disagree. Moreover, long-term sustainability is, after cost, the area where most compa- nies expect their chains to focus in the example, you don’t want your suppliers’ supplier to use next five years (cited by 19% of respondents). Asia- sweat shops.” Globalization creates a double-edged Pacific and North America firms are even more likely to problem: the growth in the number of businesses world- do so (23% and 22%) than European ones (16%). The wide makes it harder to monitor the entire supply chain, latter have the reputation of being more advanced on but modern communication technology also makes any sustainability, so the others may be playing catch-up. 14
  15. 15. environmental or social derogations by suppliers likely to of those who currently source there, expect to decrease be broadcast widely. purchasing from the country, or even stop altogether. This Sustainability goes beyond reputational damage: an en- is on top of 8% of all respondents indicating that they vironmental or social disaster can wreak havoc with how already had done so. China is not alone: 6% have signifi- a company operates. When the Grand Banks fisheries off cantly reduced sourcing from India. Yet, far more plan to North America collapsed, for example, Highliner Foods, increase buying in these markets – 30% expect China to the Canadian fish processor and marketer, had to sell its be among the top three countries seeing the biggest in- own fleet and buy catches from other sources. crease in sourcing for their company, and 29% think the Sustainability represents an opportunity for supply chains, not just another complication. Dr. Iyengar notes If your company sources products from China, what are your plans for the next five years? that it will not help if you apply environmental and so- cial criteria in a way that is merely “legalistic.” He cites n Increase sourcing from China Wal-Mart as an example of a company that is strength- n Keep sourcing levels from China about the same ening its resilience by insisting that its suppliers use 29% recyclable materials. In this way the company’s “sup- n Decrease sourcing from China 33% ply chain can shift a risk into an opportunity” to attract n Stop sourcing from China altogether environmentally conscious consumers. Reaping these n My company does not source from China benefits once again requires thinking through the issues. 1% 10% Resilience in action: low-cost country sourcing 26% Supply chains are not only globalizing but they have also been heading for suppliers in least-cost countries. Although this trend will continue, a small but significant percentage of companies are turning away from the same of India – but they do indicate that supply chain strategy. Some 10% of the entire survey group are set success has not been universal in low-cost countries. to decrease their use of least-cost country sourcing – a The reason is the perennial tension between cost and number which would increase if those who have not yet quality which has always dictated much of supply chain adopted the practice are taken from the total. strategy, and which led to least-cost country sourcing in For China in particular, 11% of all respondents, or 15% the first place. On the one hand, when selecting a new 15
  16. 16. supplier, 61% of survey respondents consider quality a respondents. For firms that said they were reducing ac- leading factor, and 31% call it significant. The equivalent tivities in China, IPR concerns were an issue, along with figures for cost, 42% and 38% respectively, indicate less corruption. The challenges of low-cost country sourcing emphasis. On the other hand, when asked about the are clearly significant. primary supply chain focus for the next five years, cost According to those interviewed for this report, the envi- reduction was the leading answer (given by 28%), and ronment may be complex, but the key to success is not: inventory optimization – often a specific way to reduce build in resilience, understand the issues, monitor and spending – was cited by a further 10%. structure the supply chain to avoid problems, and work The draw of low-cost country sourcing is that it can with suppliers to improve output. square this circle. Mr. Gurr says that “some of the best Mr. Connelly, for example, says that Leggett & “A resilient supply chain manufacturing in the world is in low-cost countries at the moment. If you put in the effort, you can find higher Platt builds up trust over an extended period. needs to be able to respond It first orders small quantities which it inspects quality for some products than nearer to home.” closely. It takes about a year to a year and a half with consistent output.” But some firms have had mixed success in finding these before the company feels secure enough “to high-quality producers. According to the survey, qual- make a decent order.” The firm also sends executives to, ity issues have been a significant challenge for 52% of or even establishes local offices in, low-cost countries. companies in low-cost countries, making it the lead- As a result, Mr. Connelly has great confidence in his ing challenge. Dr. Iyengar notes that, for these places, company’s ability to operate in China, “because we have “one of the reasons for companies withdrawing is that a been there awhile,” and have been working closely with resilient supply chain needs to be able to respond with their suppliers from a supply chain hub in Shanghai. consistent output. If you look exclusively to low-cost Mr. Gurr agrees that it is a matter of doing the work. country sourcing, consistency of quality is a problem.” “You need to invest in finding the right companies, Not far behind in the survey was another crucial ele- and need to be incredibly vigilant about from whom ment of resilience: the ability of suppliers even to deliver they purchase. You can get fantastic quality at decent what they promise (cited by 47%). Length of travel time price, but you have to put the effort in. As the econom- (34%) is an almost inevitable issue for global sourc- ics swing around, you also have to be aware about the ing, but rule of law considerations such as difficulties next country coming around and have people on the with contract enforcement and intellectual property ground who know how to do business there.” Once rights (IPR) protection also affect more than three in ten found, Dr. Iyengar adds, educating and working with 16
  17. 17. suppliers is key: companies need “to introduce powerful understanding to build structures that coherently address performance management systems, make clear what is the risks which firms face. Current challenges, such as required, and make sure that it takes place.” integrating sustainability into supply chains or getting Resilience is also about structuring the supply chain the greatest advantage out of sourcing from low-cost, intelligently. In a low-cost country context, for example, less developed countries, demand such an approach. if IPR issues are a problem, Mr. Churchhouse says that The dangers of not doing so are stark. As Professor Sheffi “the answer is that we might put finished machining points out, although companies are at much higher risk processes there, but not complex special processes, because of complex, global supply chains, “it doesn’t which is where the higher technology is. We just have to mean that consumers or countries are more vulnerable. be careful in our make/buy analysis.” There are many more companies now. It may mean dev- Building a resilient supply chain in low-cost countries is astation for one if a plant goes down, but there are lots not rocket science or anything particularly new. As Mr. of suppliers.” Other suppliers may be more resilient, and Connelly points out, “we’ve been through this before are sure to be ready to service the market instead. over the last twenty years. China is just like Korea was, and before that Japan was. The suppliers learn, and they get better.” Doing the legwork is, however, essential if a company wants to realize the same savings that its competitors are. Notes Mr. Gurr, “if you switch supplier Educating and working with without actually getting out there, without putting in the suppliers is key: companies effort to visit the factory, you come unstuck. The way to do it is to get on the airplane and have people out there.” need “to introduce powerful Conclusion performance management In seeking the benefits of global supply chains, few com- systems, make clear what is panies are paying sufficient attention to the resilience required, and make sure that of these networks. Business is vulnerable, and although many firms are taking sensible precautions, such as it takes place.” increasing the number of suppliers, much more needs to be done in areas like monitoring and using the resultant 17
  18. 18. Is the C-Suite whistling in the dark? Professor Yossi Sheffi says of working with companies: their supply chains are seeing a lot more problems in, “when we have public events, they usually make coura- for example, least-cost country sourcing than corporate geous statements. When you start drilling down, when executives seem to realize. This is especially the case for you start asking more penetrating questions – how do some key elements of resilience, such as product quality you know you are better? – at the end of the day they and the ability of suppliers to deliver what they promise say, ‘we have to take another look’. They often don’t ask (see chart). themselves the tough questions.” Finally, if corporate executives are not hearing about The split in perceptions between supply chain profession- the risks from their supply chain professionals, the latter als and corporate executives suggests the latter should may not be fully taking on board strategic start asking such tough questions. In fact, those who priorities. For example, in assessing a new Top ten problems with LCCS (percentage of companies actually work in the field are far more concerned about supplier, 63% of supply chain profession- in each category which have experienced significant the problems discussed in this report than their bosses. als believe cost is a leading consideration, challenges with issue) C-Suite Supply chain Difference professionals Looking at the situation overall: a higher figure than for quality. Corporate executives instead focus on quality, with Quality of goods 53% 61% 8% • 63% of supply chain professionals think that their only 35% giving a primary place to cost. Ability of suppliers to company needs to pay more attention to resilience. deliver what they promise 46% 61% 15% Looking forward, about half of supply chain Among corporate executives, this is a concern to professionals think the coming focus in Length of time for goods to only 46%. arrive from suppliers 31% 45% 14% the next five years will be cost, or inven- • 65% of those working within the supply chain be- tory optimization – which has significant Total landed cost 22% 37% 15% lieve it has globalized faster than risk management cost implications. The equivalent figure for Ability to enforce contracts 32% 37% 5% has kept up, a worry for only 41% in the C-suite. corporate leaders is 36%. Meanwhile, only Difficulty communicating • 29% of supply chain professionals consider their 14% of supply chain professionals expect to expectations across resilience above average, while this is the case for focus on sustainability, a concern for 20% cultural differences 29% 35% 6% 38% of corporate leaders. of corporate leaders. The split in percep- Unpredictability of travel time tions indicates that it may be time for the for goods to arrive 24% 33% 9% • Nearly twice as many supply chain professionals as two groups to talk. corporate executives (20% to 11%) think it very Border security/customs issues 23% 31% 8% difficult to obtain high-quality suppliers. Ability to maintain supply chain visibility 27% 31% 4% Many of these questions are at the level of percep- tion, and individuals often believe that their own jobs Energy/transportation expense 21% 29% 8% are more fraught than they may actually be. A deeper analysis reveals that those with the best knowledge of 18
  19. 19. IDS Group provides a global perspective from Asia Low-cost Asian economies have become the world’s do business based on expense alone, the risk is humon- manufacturing powerhouse. But the region’s business gous.” executives make clear that the basics of supply chain Another area where true and apparent costs may differ best practice are universal. Indeed, one of the most strik- is in dealing with partners. “You can’t be in every part of ing findings from the survey results is how little answers the chain,” notes Mr. Phi. “There is always a temptation varied by region. to say, for an x% cost reduction I’ll shift from provider A Joseph Phi is President and Executive Director of IDS to provider B, but it is very important for us to consider Group, a member of the Hong Kong-based Li & Fung the holistic picture. You can’t squeeze on every transac- Group of companies, one of the world’s biggest export- tion. If your partners are not profitable, it is hard to have ers. IDS provides integrated distribution and logistics a resilient supply chain,” he adds. Two other essential services, or in Mr. Phi’s words, “supply chain manage- elements of resilience are predictability and repeatabil- ment, from factory to delivery” for leading multinational ity. For the latter, Mr. Phi points out that “you can’t work and local companies, including Li & Fung. with new partners all the time. You have to work with Mr. Phi notes that the biggest challenge for supply people who understand your process.” chain management anywhere is “how do you cope with There is also a need for proper investment in any country changes, unpredictability, and volatility? One of the key where one does business. Just as other firms interviewed determinants of a good supply chain is how flexible and for this report are finding it valuable to have people on agile you are, because volatility does not go away.” Just the ground in their Chinese operations – where Mr. Phi as the problems are common around the globe, so are says IDS Group enjoys “home court advantage” – he the requirements for success. They include good people, notes that “in the Philippines, for example, you need well-designed facilities, as well as various technology Filipinos, who understand the local market and will be systems that create an overview of the entire supply able to make swift changes. As you go global you need chain, so called end-to-end visibility. to put more emphasis on the local.” But according to Mr. Phi, companies also have to “look Although supply chain investments may seem to in- at the total cost of doing business. People neglect the crease costs, in the long run they save money. Mr. Phi hidden costs,” especially in low-cost countries. This has notes, for example, that the presence of a robust contin- implications in a number of areas. The first is contin- gency plan does not simply help in a crisis, but it also gency planning. Says Mr. Phi: “crisis and contingency reduces insurance premiums. “A resilient supply chain planning is not even a ‘nice to have’, it is a ticket to the does not only generate value, but also reduces cost in game. In the supply chain business, if something can the long run.” go wrong, it already did. While there is a temptation to 19
  20. 20. Appendix A: Survey Results Where are most of your company’s key suppliers located? How difficult is it to obtain high-quality suppliers for your company’s most important products? 1% n Domestically n Very difficult 7% 9% n Abroad n Somewhat difficult n Both equally n Neither difficult nor easy 35% n Somewhat easy 36% n Very easy 33% 49% 29% What impact have the following events had on your company? At which level does your company set the governance of the following elements of your supply chain? A weaker U.S. dollar 25% 31% 21% 12% 10% 1% Overall strategy The U.S. economic slowdown 59% 21% 19% 1% 12% 28% 27% 19% 14% 1% Purchasing decisions A slowing global economy 30% 37% 33% 1% 14% 39% 24% 15% 6% 1% Rising energy costs Monitoring/compliance 29% 31% 22% 12% 5% 1% 32% 29% 37% 2% n 1 Strong Impact n2 n3 n4 n 5 No impact n Don’t know n 1 Global n 2 Regional n 3 National n Don’t know 0 20 40 60 80 100 120 20
  21. 21. Do you agree or disagree with the following statements as they relate to What level of importance does your company place on building lasting, solid, your company? long-term relationships as the best way to maintain the quality and value of the goods it gets from its supply chain? My company supply chain has globalized faster than our risk management structures have been able to adapt to the U.S. economic slowdown 13% 29% 26% 16% 11% 5% 2% My company needs to do more to integrate social and environmental considerations n High importance into our supply chain 4% n Moderate importance 14% 32% 25% 20% 7% 1% n Low importance One of my company’s big sustainability challenges is from activists and consumers n No importance who do not actually understand the sustainability impact of what they are demanding 9% 20% 25% 22% 19% 5% 38% 56% My company is re-assessing its sourcing based on geographic location rather than what is cheapest 6% 25% 27% 24% 14% 4% My company needs to pay more attention to supply chain resilience 13% 34% 31% 12% 4% 5% n 1 Strongly agree n2 n3 n4 n 5 Strongly disagree n Don’t know In your opinion, how does your company compare to its closest competitors in When evaluating a potential supplier, how important are the following factors the following areas? to your company? Supply chain management Speed 10% 38% 38% 10% 3% n 1 We are much stronger 19% 52% 23% 5% 1% Quality of suppliers n 2 11% 42% 40% 6% 1% n 3 Quality Resilience n 4 61% 31% 6% 2% 9% 29% 48% 12% 2% n 5 We are much weaker Risk awareness and management Cost 11% 35% 36% 16% 2% 42% 38% 19% 1% Ability to find and exploit new opportunities Reputation 13% 36% 32% 18% 1% 22% 43% 24% 9% 3% Awareness of corporate social responsibility issues 15% 30% 35% 17% 3% End to end visibility n 1 Most important n2 n3 n4 n 5 Not at all important 8% 24% 47% 17% 3% Profitability 13% 34% 0 20 36%40 14% 60 2% 80 100 120 21
  22. 22. In your experience with global supply chains in low-cost countries, which of At your company, how frequently does the supply chain function engage in the following issues have presented significant challenges for your company? formal risk management to assess the possibility of and consider strategies to Select all that apply. reduce risk? Quality of goods 52% n Annually Ability of suppliers to deliver what 47% 18% n Quarterly they promise 29% n Monthly Length of time for goods to arrive 34% n Weekly from suppliers 8% Ability to enforce contracts n Never 32% 4% n Don’t know Intellectual property protection 31% Difficulty communicating expectations 13% 29% 28% across cultural differences Unpredictability of travel time for 26% goods to arrive Ability to maintain supply chain visibility 25% Border security/customs issues 25% Total landed cost 24% Energy/transportation expense 22% How closely does your company monitor its suppliers? Ability to return goods 20% n Monitor immediate (Tier 1) Other rule of law issues 20% 9% suppliers only (rely on them to Finding secure transport for goods/loss 9% monitor their suppliers) of goods in transit 15% n Monitor immediate (Tier 1) suppliers Adverse reaction in home markets 42% 11% and their immediate suppliers No experience 20% n Monitor the entire supply chain 12% n Do not monitor 30 40 50 60 n Don’t know 20% 22
  23. 23. In its supply chain, which of the following reputational aspects does your Which of the following steps is your company taking to improve its supply company monitor most closely? Select up to two. chain resilience to potential crisis? Select all that apply. Product quality 64% Internal benchmarking of supply chain 51% breakdowns and lessons learned Resilience/ability to deliver what is promised Hold additional safety stock 35% 40% Compliance with legal standards Do joint planning with channel 27% 31% (anti-corruption, anti-money laundering, etc) partners on such a situation Product safety External benchmarking of supply chain 20% 29% breakdowns and lessons learned Respect for your own intellectual property Conduct crisis simulation exercises 16% 20% Respect for intellectual property of other Collaborate with local governments 13% on contingency planning 16% companies to prevent potential litigation for abuse Environmental impact Collaborate with competitor firms 9% 16% Employment conditions Other 6% 4% 10 20 30 40 50 60 70 80 0 10 20 30 40 50 60 Where are your company’s technology investments primarily directed? Over the next five years, how do you expect your company’s inventory levels to change? n Managing internal processes n Increase greatly 5% 5% 11% 12% n Combination of internal and n Increase slightly external process management 18% n Stay roughly the same n Managing processes of suppliers 27% n Decrease 43% and other supply chain partners n Don’t know n We do not invest in technology 40% 40% 23
  24. 24. Over the next five years, which will be the key focus for your company’s Over the next five years, which factors are most likely to pose the greatest risk supply chain? to your company’s global supply chain? Select up to three. Energy costs 53% n Cost containment/reduction 9% n Long-term sustainability Competition 40% 10% 28% (economic, social, environmental) Supplier disruption n Process innovation 36% 16% n Technology innovation Logistics failure (port strike, etc.) 26% n Inventory optimization 19% Strategic failure (incorrect shipments, n Improving risk mitigation practices defective products) 25% 18% Geopolitical instability 21% Corruption 13% Natural disaster 13% Over the next five years, how will your company’s supply chain strategy Export restrictions 9% change in the following areas? Nationalization 8% Least-cost country sourcing 1% Terrorism 6% n 1 Increase greatly 13% 35% 34% 9% 7% 0n2 10 20 30 40 50 60 Near sourcing 3% n3 Over the next five years, how do you expect your potential pool of high- 7% 28% 42% 13% 8% n4 quality manufacturing suppliers to change? Multi-sourcing strategy 1% n 5 Decrease greatly 12% 38% 32% 7% 8% n Don’t know n Increase greatly In-house manufacturing 12% 10% n Increase somewhat 5% 14% 30% 23% 16% 11% n Neither increase nor decrease n Decrease somewhat 26% 51% Decrease greatly 0% 24
  25. 25. Are there any countries where your company has ceased/significantly reduced your sourcing because of risk? Select up to three. Countries 1 2 3 Countries 1 2 3 Countries 1 2 3 Afghanistan 9% 0% 0% Guinea 0% 1% 0% Serbia 1% 1% 2% Aland Islands 1% 0% 0% Honduras 1% 0% 0% Slovakia 0% 1% 0% Preface Albania 1% 0% 0% Hungary 1% 0% 0% Somalia 0% 0% 2% Angola 1% 1% 0% Iceland 0% 1% 0% South Africa 1% 3% 0% Argentina 0% 1% 5% India 10% 4% 5% South Korea 0% 1% 0% Armenia 1% 0% 0% Indonesia 5% 1% 5% Spain 0% 0% 2% Australia 1% 0% 2% Iran 4% 1% 4% Sri Lanka 1% 0% 0% Azerbaijan 0% 3% 0% Iraq 1% 8% 0% Sudan 1% 0% 2% Bahrain 0% 0% 2% Israel 1% 1% 2% Taiwan 0% 3% 0% Bangladesh 2% 1% 2% Italy 1% 0% 0% Tajikistan 1% 0% 0% Belarus 0% 0% 4% Japan 0% 0% 2% Thailand 0% 1% 5% Belgium 0% 0% 2% Kenya 1% 0% 0% Tunisia 1% 0% 0% Bermuda 1% 0% 0% Kuwait 1% 0% 0% Turkmenistan 0% 1% 2% Bhutan 0% 1% 0% Kyrgyzstan 0% 0% 2% Ukraine 1% 1% 2% Bolivia 1% 3% 0% Latvia 0% 0% 2% United Kingdom 0% 3% 0% Bosnia and Libya 1% 0% 2% United States Herzegovina 0% 3% 2% Lithuania 1% 0% 0% of America 4% 1% 0% Brazil 1% 3% 4% Madagascar 0% 1% 0% Uzbekistan 0% 1% 0% Bulgaria 0% 3% 2% Malaysia 1% 1% 0% Venezuela 1% 0% 4% Burkina Faso 0% 1% 0% Malta 0% 0% 2% Vietnam 0% 1% 2% Cambodia 0% 1% 2% Mexico 0% 1% 0% Zimbabwe 0% 3% 4% Cameroon 0% 0% 2% Moldova 0% 1% 0% Total 100% 100% 100% Canada 1% 1% 0% Morocco 0% 1% 0% China 16% 7% 0% Myanmar 1% 3% 0% Colombia 0% 3% 0% New Zealand 0% 0% 2% Congo 1% 0% 0% Nicaragua 1% 0% 0% Cuba 1% 0% 0% Niger 1% 0% 0% Ecuador 1% 0% 0% Nigeria 1% 3% 2% Egypt 0% 0% 2% Norway 1% 0% 0% Eritrea 0% 0% 2% Pakistan 4% 1% 4% Ethiopia 0% 1% 0% Papua New Guinea 1% 0% 0% France 1% 0% 2% Philippines 1% 1% 2% Germany 3% 1% 0% Poland 1% 0% 5% Ghana 1% 0% 0% Romania 2% 1% 0% Greece 1% 0% 0% Russia 5% 7% 4% 25
  26. 26. If your company sources products from China, what are your plans for the When your company is looking for suppliers in new markets, which factors are next five years? considered most important? Select up to three. n Increase sourcing from China Product safety 38% n Keep sourcing levels from China about the same Preface 29% n Decrease sourcing from China Intellectual property protection 31% 33% Shipping cost n Stop sourcing from China altogether 31% n My company does not source from China Rule of law issues 30% 1% 10% Labor cost 29% 26% Shipping time 26% Visibility 18% Shipping security 14% If you plan to reduce or stop sourcing from China, what is your primary Cultural differences 13% reason why? Corruption 12% Nationalism, corruption or Other 7% 9% intellectual property concerns Inflation 7% 0 5 10 15 20 25 30 35 40 Labor costs 5% Transportation expense 4% Infrastructure issues 2% Other 3% No plan to reduce or stop sourcing from China 40% My company does not source from China 32% 25 30 35 40 26