How to learn from supply chain mistakes

By their nature, significant supply-chain disruptions demand a swift and multifaceted reaction, but the response to near-misses should go beyond a sigh of relief. In supply chain, as elsewhere, a bullet dodged should ideally become a lesson learned—or possibly two, three or more.

The 2014 Supply Chain Resilience Survey, conducted by the Business Continuity Institute (BCI) on behalf of Zurich Insurance Group, highlights the ongoing and always-changing nature of these challenges. Based on data collected from 525 respondents in 71 countries, it underscores the fact that most businesses still demonstrate a worryingly high level of haziness when it comes to incorporating supply chain risks into a holistic risk management strategy at the enterprise level.

Despite the fact that more than four-fifths of the survey respondents (81 percent) experienced at least one supply chain incident that caused disruption—with 51 percent originating below the level of immediate—many Tier 1 suppliers still lack full visibility into their critical supply chains.

Equally troubling: Companies reporting a low level of top management commitment to supply chain issues spiked from 21.1 percent to 28.6 percent—the C-suite is decreasing engagement in (and, likely, resources for) this key performance area at a time when the world is growing increasingly connected.

And while the percentage of firms with business continuity arrangements in place against supply chain disruption has risen more than 20 percent in the past two years, to 72 percent, small and midsize enterprises (SMEs) are much less likely to have a business continuity plan than large businesses (60.2 percent vs. 76.2 percent). The lack of such a plan can magnify the impact of any disruption.

Increased Disruptions Deeper Down The Chain

“Companies should be thinking about how they organize themselves as they see the growing percentage of disruptions happening below the direct-supplier level,” says Nick Wildgoose, Global Supply Chain Product Manager, Zurich Insurance Group. “It should be yet another wakeup call for those that only focus on Tier 1 suppliers, and then say it’s up to those suppliers to manage their own suppliers. That’s abdicating responsibility, and companies need to take a different kind of action.”

The biggest causes of supply chain disruption according to the Supply Chain Resilience Survey were:

Unplanned IT/telecom outages (52.9 percent)
Adverse weather (51.6 percent)
Outsourcer service failure (35.8 percent)
These have been the top three causes of disruption for three years running. Yet the threat landscape did change. Three types of disruptions have entered the top 10:

Data breach (8th, up three places)
Industrial dispute (9th, up eight places)
Currency exchange rate volatility (10th, up 10 places)
The top consequence of supply chain disruption remained the same for the sixth straight year: 58.5 percent of respondents said a loss of productivity was the biggest hit that they took from disruptive events in the previous 12 months. This was followed by the increased cost of working (47.5 percent), loss of revenue (44.7 percent), customer complaints (41 percent) and service outcome impairment (38 percent). It is also worth noting that nearly one-quarter of respondents reported negative external social media discussions emanating from a supply chain disruption.

When asked to look ahead five years respondents foresaw an evolved world of threats. Cyber-attacks, which only figured in the top 10 causes of supply chain disruption once in six years, were the biggest concern (54 percent), followed by IT/telecom outage (51 percent), outsourcer service failure (42 percent), data breach (41 percent), and adverse weather (39 percent).

“It’s a performance opportunity for companies to better coordinate their supply chain and take out some of the disruption cost,” says Zurich’s Wildgoose. “Setting the right culture is a change-management exercise, and it has to come from the top. If top management aren’t giving that commitment for whatever reason, then you have issues.”

Learning From Close Calls

As the Supply Chain Resilience Survey report underlines, supply chain disruptions are a matter of if, not when. A near-miss in this context may mean not the absence of disruption, but an apparently minor disruption, or a would-be disruption papered over by inventory on hand, for example, or by paying for expensive air freight rather than sea freight in order to overcome logistics issues.

As with a direct hit, near-misses should be seen as opportunities to remind top management that its support is essential to take the necessary steps to shore up the supply chain. It should go without saying, but is important to emphasize, that a crisis-management approach isn’t the way forward; proactive leadership is needed. Yet the largely unchanged number of supply chain disruptions reported throughout the survey’s history suggests little progress has been made on this front.

“Having an organization with a top-down approach is needed to drive the right culture to learn from your near misses,” says Wildgoose. “Without that, you’re not going to start measuring and learning properly, in a cross-functional way, throughout your whole organization, and to take responsibility for your customers and suppliers, too. With that in place, you can get the support, for example, for measuring misses around delivery dates.”

The most common key performance indicator (KPI) is, indeed, delivering to customers on time. Wildgoose notes that this is just one area where small issues can often be predictive of potentially larger ones. That one-day slip from a traditionally reliable supplier might be overcome with inventory but this, like the sudden appearance of quality-control issues, can be predictive of larger, disruptive problems, for example financial troubles.

“These are things that should be noted,” says Wildgoose. “If you can deal with small problems properly, you can prevent bigger ones.”

Different Industries, Different Levels of Resilience

Building resilience can mean different things in different industries. In construction, for example, the survey shows that businesses are typically more vulnerable to disruptions from adverse weather (responsible for 71.4 percent of disruptions) and IT/telecom outage (66.7 percent) than most other industries. Construction is project-driven by nature, with contract requirements that change often and large swings in capacity. It’s little wonder, then, that a recent StrategicRISK magazine survey showed that almost two-thirds of construction sector risk managers viewed supply chain risk as their number-one concern.

In the past, construction contracts were generally negotiated and awarded in such a way as to push risk onto contractors and their subcontractors. Should a contractor go out of business, the consequences for the project and the construction company heading it can be swift. Managing risk on a joint basis, instead of simply passing it on, has become the preferred move for forward-thinking insurance companies.”

“The current thinking is, ‘There’s risk in the project, how do we manage it?’” says Zurich’s Wildgoose—“versus the old way, where it might have been pushed onto the weakest contractors. That might have seemed a clever bit of business, except it meant nothing, because when things went wrong, everybody got in trouble.”

Construction often faces significant site risks. Some companies have begun to tackle this issue by prefabricating more of the work offsite in a controllable environment. It’s a simple step that can yield significant advantages.

Room For Improvement

More generally, putting effort and investment into one’s supply chain dependencies can produce benefits, too. Still, the survey demonstrates that combating supply chain risk with proactive action to create resilience has a long way to go.

There are often strategic suppliers who are the sole (or sole realistic) source of material or expertise. Just-in-time manufacturing can further stress supply chains and cost-cutting due to economic pressures can add risks. So, too, can increasing supply-chain complexity, with multiple contractors and subcontractors. For these reasons and more, a deep understanding of who will be responsible for managing supply chain risk is essential, in construction as in all industries. The answer is likely “Everyone”—the board of directors, senior executives, risk directors, supply chain managers, project managers, etc. Thus, the issue revolves around clear communication between those responsible, something that overlapping responsibilities can complicate.

Consistent support from top management and sturdier supplier relationships with robust, well-documented processes and well-mapped, flexible supply chains is a start. Improving supply chain resilience contributes to a company’s performance and is essential to maintaining its competitiveness. Disruption can be a disaster; preparedness can make for opportunity.

“You need joined-up thinking in terms of supply chain and project management—how everything fits together throughout the chain, and how it’s all managed,” Wildgoose says. “The companies that are leading in this area are seeing a financial benefit from it.”

Published in collaboration with Zurich Knowledge Hub

Author: Evan Rothman is a writer for Zurich Knowledge Hub.

Image: Crew members of a ship loaded with containers filled with rubbish from Britain wait for its departure from the port of Santos August 5, 2009. REUTERS/Paulo Whitaker.