‘In any business it is crucial to know your full supply chain’
Supply chain is terminology that is thrown around in business and is a term that most people in business use, openly and without real thought being applied to it.
It’s used in meetings, board discussions and in their business plans. However, when questioned very few people really understand who their supply chain is and the real implications a supply chain has on their business. When speaking to number of businesses in Yorkshire, I asked if they knew their supply chain, and many responded with a resounding yes – which was great to hear. However, when I dug deeper, I discovered they only really knew their immediate supplier and never felt they needed to question beyond that.
In any business it is crucial from the disaster recovery perceptive but also from an ethical point of view to know your full supply chain. Given that in today’s world, supply chains are so interconnected and complex the slightest disruption can have a catastrophic impact on the business.
So how does the supply chain work on a basic level? Let us take retail as an example. In order to service a customer, the retailer will rely upon a network of entities, directly or indirectly interlinked and interdependent. In this example, the supply chain is likely to start with the supply of raw material, say cotton. This will be purchased by another entity that will process that raw material and make it into cloth, which is then sometimes then sourced by another entity who become the wholesalers of the cloth.
The wholesalers, in turn, will supply it to the factories who make the garment which is then sold to the retailer and then eventually the consumer. This can be applied to any business. Break any part of that cycle and we have a problem.
How is the supply chain often viewed? “The supply chain will ultimately be measured on its ability to produce bottomline results... However, with significantly increased input costs, relying only on these measures can mask true supply chain performance.” Mark Sutton, senior vice president, Global Supply Chain, International Paper.
According to a recent IBM paper. ‘The Smarter Supply Chain of the Future’, the key challenges faced by most businesses in a supply chain are:
Cost containment – trying to limit cost is proving difficult in a global network and being able to adapt.
Visibility – this proves to be low on the agenda for most businesses and those that attempt to address this find resistance. Visibility of your entire supply chain is crucial.
If disaster strikes you will know how and where to plug any hole within the supply chain. Equally as important is to understand the ethics and environmental impact of the supply chain.
Risk management – this in contrast ranks very highly with companies. If the supply chain is fully understood, as a business, you can react a lot quicker if one aspect of your chain is in trouble.
Globalisation – has had a negative effect on the supply chain. “Contrary to initial rationale, globalisation has proven to be more about revenue growth than cost savings.” IBM
What happens when tragedy strikes causing a disruption in the supply chain? We have seen the recent disrupted supply chain with KFC who had to close 900 outlets as a result of bringing in a new supplier who was experiencing “teething” problems. The damage KFC incurred was to their brand, customer loss, loss of revenue, having to continue to pay staff, and having to deal with the media.
It was estimated that their overall loss was £1m per day. I could understand that as a reader you may be sympathetic and say well it was not their fault, that the supplier let them down. However, someone within KFC failed to understand risk and they should have had systems in place just for this contingency.
A more serious consequence took place in March 2000. They were two of the dominant players in the mobile telephone industry, namely Nokia in Finland and Ericsson
in Sweden. At the time the top three contenders for market leadership were
Nokia, Ericsson and Motorola.
The demand was on the increase for mobiles, the market was ripe. Phillips was the supplier of mobile chips to both Nokia and Ericsson.
Nature had other plans. As a result of a lightning strike to a power line the power went out at the Phillips plant and the cooling fans shut down, eventually causing a fire. Phillips had stated that they did not expect production to be offline for more than a week. How each company reacted was different and had a lasting impact on their business.
Nokia had kept their supply chain visible and understood the risk and therefore acted quickly. As a business Nokia had already anticipated that at some point there was going to be a shortage of supply of chips and had already lined up a number of smaller suppliers.
Ericsson, on the other hand, delayed in relaying the information internally. It took three weeks for anyone to appreciate the full impact of what had happened. By the time Ericsson reacted it was too late. They had to delay the launch of their new phone estimating a direct loss of £400m.
Therefore the top tips would be: Carry out a risk assessment of your supply chain and ensure that the whole chain is visible
Prioritise areas and ensure that you have a disaster recovery plan in place
Have back-ups in place.
Gather information from the suppliers – who are their suppliers and be open as to why you need the information.
Don’t allow your business to become vulnerable!
BREAKDOWN:KFC failed to understand the supply chain risk and they should have had systems in place for such a contingency.