The government warnings about tainted imports from China are ominous: poisonous chemicals found in toothpaste in July. Detained imports of farm-raised Chinese seafood and lead paint in Thomas the Tank Engine toy trains in June. Contaminated pet foods in May.
MORE ON SUPPLY CHAINS
While much government attention focuses on the problems in China, experts say the emergence of these deficient goods highlights the risks associated with today’s global supply chains. The far-flung networks of suppliers and transportation systems connecting them to their destinations present a new set of challenges.
Longer supply chains mean more participants, and with that, come bigger risks. “There are more people that companies need to watch and make sure they trust,” says Yossi Sheffi, professor of engineering at MIT and an expert in risk analysis and supply chain management. Supplier visibility is a problem for many organizations, according to Mark Hillman, a research director at AMR Research, who says many companies operating globally don’t know every player in their supply chain as well as they should. In addition, increased speed means decreased time for product checks. Goods rarely stagnate in warehouses, so there is less opportunity to conduct quality checks, says Sheffi.
Such threats to the supply chain increase the importance of security, which like any other type of risk management, can be a hard sell. Getting it in place can be costly, and ROI is hard to justify, unless, of course, something goes wrong. The key to selling security, experts say, is to emphasize the collateral benefits—the kind of ROI that will be realized regardless of disaster. A 2006 Stanford report, which studied the supply chain behaviors of 11 logistics companies that are considered innovators in supply chain security, outlines some of those benefits: improved efficiency, better customer satisfaction, better inventory management, and reduced cycle and shipping time. (See a copy of the study here.)
Below are some of the most common supply chain risks according to Sheffi and Hillman, and ways you can manage them through security, resilience and vigilance.
What Can Go Wrong in a Global Supply Chain
The unexpected loss of a supplier: According to a study conducted by AMR Research in 2006, the number-one concern across industries is supplier failure and continuity. It’s particularly difficult to keep track of suppliers that may go out of business with little forewarning when you outsource, says Yossi Sheffi, an MIT professor and supply chain risk expert. “Suppliers in the U.S. or Europe are easier to manage than those in the bowels of China.”
Geopolitical problems: A terrorist attack in the area of a major port can cause significant disruptions or shut down service altogether.
Damage to the brand: This could be related to product safety or counterfeiting, says Sheffi. “A company’s suppliers might be using child labor or sweatshops, or stealing intellectual property and copying the brand.”
Natural disasters and diseases: A hurricane near a major port, a disease outbreak (such as avian flu) or any other natural event over which there is limited control.
How to Manage Supply Chain Risks
1. Focus on visibility inside your supply chain. Sheffi says you should be able to answer the following question: “Where’s my stuff, what ship or truck is it on, and what can I do to redirect it in case something goes wrong in order to get it to the customer who needs it?”
An information system should be able to provide the most up-to-date status of where everything (shipments, products, parts) is, says Sheffi. CIOs should also refuse to contract transportation companies (maritime, rail, trucking, air) that don’t give continuous status reports. “They should be able to track something all the way, like a FedEx package,” says Sheffi.
Companies also need to watch their products all the way to the shelf. In many cases, counterfeit goods are introduced into the supply chain somewhere along the way, after the manufacturing plant, says Sheffi. This applies particularly to pharmaceutical companies, which are audited and need to meet many compliance regulations. “You need to make sure you can account for every bottle and where it was,” says Sheffi. Hillman says traceability systems that are used to track the movement of products through the supply chain should combine both human inspectors and sensor technologies like RFID.
2. Keep an eye out for problems. Your company should appoint a leader or hire a service provider who’s responsible for constantly monitoring news feeds to keep abreast of what’s going on at supplier companies around the world and the countries where they are located. Companies such as Control Risks Group and iJet are examples of companies that monitor economic and political conditions as well as natural disasters around the world, which risk managers use to keep tabs on working conditions for far-flung employees and business partners overseas.
More specifically: If a particular company in your supply chain starts to have a problem with a product in the same category as your products (food, drugs, manufactured goods), a team should be immediately dispatched to your suppliers overseas to make sure that you don’t have the same problem, says Sheffi. “If you find out you do, you need to stop it before it gets to the press and the customer.”
3. Know what you’re getting into. Hillman says that suppliers typically put their best feet forward during the sourcing process, when buyers are evaluating them carefully. But once you sign the contract, it’s hard to verify that your supplier is meeting the same standards every day that it sold you on. Regular visits to suppliers and constant monitoring is ideal, but Hillman says that many companies don’t have the resources for surprise audits. Monitoring tools, such as Dun & Bradstreet’s Open Ratings service, can help companies scour publicly available documents looking for patterns that might signal potential problems, such as changes to a supplier’s quality score or payment terms. Open Ratings also has a feature that allows companies to rate suppliers, in much the same way that customers can rate sellers on eBay, says Hillman.
4. Collaborate with other companies. In some industries, such as the technology business, chances are good that your supplier is also your competitor’s supplier. Work with others in your industry to audit certain suppliers and share the results, says Sheffi.