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Volume 15
Number 2
February 2013
Logistics & Transport Focus
LOGISTICS & TRANSPORT
focus
February 2013
www.ciltuk.org.uk
Supply chain horrors
Preparing for ‘black swan’ events – see page 48
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OPINION
SUPPLY CHAIN
AUTHOR
Dan Quinn
FOCUS FEBRUARY 2013
The automobile supply chain
was hugely impacted by the
Japan earthquake and tsunami.
Brand-new Toyotas are seen
destroyed at Sendai Port.
48
Take care to avoid the
horrors in the chain
Supply chain horror stories are becoming a common occurrence,
with black swan events taking their toll on global lines of
supply. But there is a much wider spectrum of potential
disasters that could turn your blood cold and send investors
running for safety.
The far-reaching consequences of supply chain timeframes and with minimal inventory as backup.
disruption, supplier failure and damage caused to a brand Just-in-time processes keep supply chains lean, but such
through supplier malpractice are all too readily visible as distances make them extremely vulnerable to disruption.
horror stories in the press: incidents that undermine A significant number of high-impact, low-probability
market confidence and directly impact corporate black swan events hit supply chains in 2011, with the
profitability and shareholder value.The potential for such New Zealand earthquake, the Japanese tsunami and
horrors to strike has increased dramatically in recent floods in Thailand. The Japanese tsunami in March was a
years with the emergence of highly complex and greatly true horror story, causing huge disruption to automotive
Dan Quinn, New Sector extended supply chains. Lines of supply for all manner of and technology supply chains. Parts shortages from the
Development Director, Achilles goods and components traverse the globe within tight Japan earthquake impacted car production worldwide,

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hitting Toyota, Nissan and Honda, in particular, costing The Achilles research reveals that 43% of businesses
Supply
many hundreds of millions of dollars in lost production are aware of a high-risk supplier failing to meet compliance Chain
for the sector. Floods in Thailand in the autumn caused requirements. In addition, 8% of organisations interviewed
further chaos when clusters of specialist hard disc drive believe that more than half of their suppliers are high Transport
manufacturers were inundated, removing a third of risk, which is defined as suppliers whose: ‘financial failure, Planning
global production capacity for a highly sought-after failure to deliver or failure to comply with relevant
component for notebooks. legislation or regulation would cause significant financial Rail
Corporations are becoming acutely aware of the cost and/or reputational damage’ to the buyer.
impact such supply chain issues have on the financial Interviews conducted as part of the research offer Active
Travel & Travel
performance of the business. Reflecting this, findings from some interesting insights: Planning
research conducted by Achilles and IFF Research: The term ‘black swan’ event
‘A supplier was fraudulently identifying parts. They went was introduced by Nassim
Attitudes to supplier pre-qualification, indicates that chief to jail as a result. Our company had to reaccredit our Nicholas Taleb in his 2004 book Bus &
Coach
procurement officers (CPOs) regard a supplier’s ability suppliers.’Transport, storage and communications
Fooled By Randomness. It is an
event with the following three
to deliver in terms of quality, timeliness and cost as their sector attributes. First, it is an outlier, Ports
most important risk to manage. Some 75% put it in their as it lies outside the realm of Maritime
Waterways
‘We’ve had companies that have had a guy killed on regular expectations, because
top three risks.
the site. We stopped dealing with them.’ Manufacturing nothing in the past can
But are events of this nature really so unlikely? Every convincingly point to its Freight
sector possibility. Second, it carries an Forward
year natural catastrophes occur. Should we not be extreme 'impact'. Third, in spite
‘The use of substandard labour by [supplier] caused
planning and mapping out our critical supply chains with of its outlier status, human
damage to our brand reputation.’ Transport, storage nature makes us concoct Aviation
regards their exposure to risk, natural or otherwise? How explanations for its occurrence
and communications sector
aware are we of the full spectrum of issues, particularly after the fact, making it
from our suppliers, that present significant risk to our ‘We use subcontractors a lot in the construction explainable and predictable.
supply chains and company share value? What is clearly industry – and our supply chain is international. In the
needed is a more holistic view of supply chain risk. last two years it feels as if we’re just one small step
away from bankruptcy.’ Construction sector, more
Tsunamis may present dramatic images of supply
than 250 employees
chain failure; but supply chain risk, with all its potential
‘Because we are a water company, quality is an issue.
www.ciltuk.org.uk
horrors, comes in a multitude of forms, ranging from
physical disruption due to natural disasters, transport We could be sued if something goes wrong and then
failure or civil unrest to the financial impact of a supplier there is the problem of bad publicity.’ Utilities, mining
going out of business or damage to reputation from a and quarrying sector
supplier using child labour or failing to comply with According to Nick Wildgoose, Global Supply Chain
health and safety standards. Then, of course, there are Proposition Manager, Zurich: ‘Research we did with the
49
risks surrounding exposure to fraud, litigation and Business Continuity Institute found 85% of companies
corporate social responsibility issues. All these risks hold had suffered some kind of significant disruption in 2011.
the potential to impact share value, and frequently do. That wasn’t perhaps so surprising; but for the first time,
This distribution centre was hit
by a freak flood
NEXT PAGE

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OPINION
SUPPLY CHAIN
In recent years, considerable
exposure in the press over the
use of child labour at suppliers
has affected major consumer
and retail brands
we looked at where this disruption was occurring and suggests: ‘The horrors in the chain can come from
40% of the disruptions were below tier one.The focus of insolvency as much as physical damage, particularly when
FOCUS FEBRUARY 2013
those few companies taking the lead in this area is on tier you go down the chain. Often companies are unaware of
one. Very few of them are tracking back through the an important component coming from an SME at a
tiers, even for their most important components or their lower tier. It could be that the SME has a financial
most profitable products.’ problem and is in danger of collapse. So buyers need
He poses two highly pertinent questions: greater visibility of lower tiers and what’s happening on
those levels.’
What are your tier one suppliers doing about their
own supply chain resilience? The Achilles report confirms buyer anxiety regarding
supplier finances, finding that the second most
50 How are you checking that? concerning risk for buyers is that of a supplier going out
There are plenty of examples of companies whose of business. Nearly half (48%) of companies surveyed by
reputation and brands have been badly damaged by a Achilles were concerned about the financial failure of
supplier or subsupplier being non-compliant with a suppliers’ businesses and put it in the top three risks they
buying organisation’s corporate social responsibility have to manage. Although credit availability may be a
little better than it was a year or two ago, the financial
(CSR) policies. In recent years, considerable exposure in
security of many suppliers remains an open question.
the press over the use of child labour at suppliers has
The horrors of a supplier going under were
affected major consumer and retail brands such as Nike,
graphically demonstrated by the impact Woolworth’s
Primark and Gap.
collapse had on music and DVD retailer Zavvi, when
Few outside of retail consider the damage that may fulfilment of Zavvi orders halted as a result of its
ensue from, say, the discovery that a boiler suit used by a outsourced service provider, Entertainment UK (an
major oil company was produced using child labour, or offshoot of Woolworth’s) being hit by its parent
that a hose component sourced by an engineering company’s woes.
company was manufactured under appalling working Buyers face a continuing risk of a supplier going under,
conditions. No company can divorce itself from the maintaining the prospect of interruptions or failure in the
errant policies and practices of its suppliers. As those in supply of critical components and services. If a supplier is
the retail sector have determined, ethical auditing of vulnerable it is worth knowing about it in advance. That
way an alternative supplier may be sought, or, if the
suppliers is a necessary process for reducing exposure to
supplier is a single source for a vital component or
this potentially highly damaging source of risk. It is
service, action may be considered to help that supplier.
important that other sectors, too, recognise the Either way, predictive financial tools and up-to-date credit
importance of monitoring suppliers in this way. ratings on suppliers is the only way of reducing exposure
However, results of the Achilles research indicate that to this very real risk.
62% of buyers seem to be relatively unconcerned about Nick Wildgoose advocates mapping out the critical
the risks suppliers present to the reputation of their supply chains to understand where the key production
business, with only 38% ranking it in their top three most sites are and the critical raw material sources, so that you
important risks to manage. Larger companies are more can more readily see your exposure to such risks as
in tune with exposure to CSR issues, with 23% of natural disasters or areas of potential civil unrest. But he
organisations with turnover between £250 and £999 also emphasises the importance of checking less obvious
million, putting their most important risk faced as risks, such as those relating to intellectual property. He
says there are many instances of companies neglecting to
managing their brand and reputation, while smaller
carry out simple checks on whether a supplier has been
companies are more focused on financial risks.
involved in any issues surrounding intellectual property
Financial failure of a supplier has been a particular risk infringement. A simple, inexpensive check could save
to the supply chain in recent years. Nick Wildgoose many millions of dollars.

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Health and safety is another area where horror stories Mitigating the risks presented by suppliers is
Supply
abound. Risk from suppliers failing to be compliant on dependent on having accurate supplier data. However, Chain
health and safety issues can have a hugely damaging impact most CPOs are unaware of the poor state of their
on a buying organisation’s reputation – and that is apart databases and are consequently at great risk. Achilles Transport
from the great disruption, high costs and potential for has worked with hundreds of companies across the Planning
globe. Almost always the senior managers of the
litigation that can result from a supplier’s actions, or lack
procurement department have been shocked at the
of actions, at whatever tier. If a fatality occurs on the Rail
poor quality of their own data, when they had believed
buyer’s site, it is going to be the reputation of the buyer it was significantly better than it really was. Gaining a
that suffers. Ensuring that a high-risk supplier’s clear view of your supplier base, with access to pertinent
Active
Travel & Travel
Planning
management processes relating to health and safety are information that has been qualified, evaluated and
robust is critical to offsetting this potentially, highly monitored is absolutely essential to avoiding the horrors
Bus &
damaging risk. that can, and regularly do, strike the supply chain. Coach
The damage to the Fukishima Ports
nuclear plant had unexpected Maritime
Waterways
repercussions on supply chains.
A particular pigment used in
the manufacturer of black paint Freight
for many automobile makers Forward
was only produced in this
region; as a result even Ford
could not supply a black car Aviation
for a while.
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51
ESSENTIALS
ABOUT THE AUTHOR
Dan Quinn is New Sector Development Director, Achilles.The company identifies, qualifies, monitors and
evaluates suppliers on behalf of major organisations worldwide, and builds and supports buyer-supplier
communities in many industry sectors to create global networks. Website: www.achilles.com
FURTHER INFORMATION
For more information about the issues raised in this article, why not join our Outsourcing & Procurement
Forum? See our website www.ciltuk.org.uk for more details.
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