Risk management should lead to sustainable supply chain
09 Oct 2008Extensive globalisation and the outsourcing of logistic services in line with just-in-time principles have made numerous supply chains vulnerable. The question is if companies sufficiently allow for this vulnerability when they decide for example to delocalise. “Surprisingly few companies have a mature risk management model in their supply chain,” warns Professor Ann Vereecke from Vlerick Leuven Gent Management School.
Natural
disasters, strikes, and bankrupt suppliers are just some of the causes of
problems in the supply chain. The more parties involved and the greater the
distance, the greater the complexity and the risk. What’s more, many companies
have now reduced their stock levels as part of their lean operations approach.
This can considerably increase the effect of any calamities. For example, if the
Antwerp docks strike, then the production line at General Motors falls still
within a day. So maybe some companies have become too lean. “The effect
is often immediate,” says Professor Ann Vereecke from Vlerick. “Too much is
never good. Just-in-time management never aimed to reduce stocks to zero.”
Companies that cut away too much ‘slack’ will of course suddenly become
vulnerable. “But you can reduce stock levels simply by eliminating
uncertainties,” says Vereecke.
Risk models
In contrast to the financial sector where risk management is an everyday, and essential, concept, there are still only a few companies that work with risk management in their supply chain. Which is why Vlerick, in collaboration with Prime Foundation Partner Möbius, have set up a programme to collate logistic risks in a practical model based on such questions as where can calamities be anticipated, how big is the risk that they will occur, what is their impact and how can risk be reduced or the impact minimalised.
Professor Vereecke identifies five types of risk, namely: suppliers and their possible quality problems (for example, Mattel’s children’s toys that suddenly have lead paint on them); unpredictable markets (for example, new markets or exchange rate differences); environmental factors (such as natural disasters, fire, developments in labour costs); business process risks (for example, the breakdown of an essential machine); and finally, control system risks (such as incorrect information on stock levels).
Sustainable supply chain
Many organisations have in the past few years taken on a global sourcing strategy, with added complexity and risk. “Quality standards are not uniform across the globe and sometimes you even have to deal with corruption,” explains Professor Vereecke. In addition, the costs of raw materials and transport have risen sharply while labour costs in typically low-wage countries are gradually increasing. “Decisions on delocalisation are often based on a situation at a particular moment in time,” says Vereecke. Not enough companies consider how long production should be in place before it needs to break even or how steeply transport and labour costs are allowed to increase. This means that global sourcing isn’t always the optimal choice. In fact Ikea, for example, is going to manufacture its goods for the American market in... America itself. And finally, more and more companies are basing their supply chain on ecological or ethical aspects by eliminating unnecessary transport or excluding suppliers involved in social exploitation.
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