The FINANCIAL — There is an argument that, even as we emerge from recession, there is still plenty more corporate pain to come. After two years when businesses were predominantly focused inwards as they battled their way through the crisis, conditions have now eased, allowing businesses to properly take stock of the state of their supply chains.
What they have seen has likely not been pretty, as any number of recent product recalls may testify to. This situation may be about to get worse before it gets better with a number of large businesses likely to be sitting on a supply chain bombshell of their own, claims Richard Nixon of KPMG’s Advisory practice.
When I read press reports of product recalls and supply chain failures, I can’t say I’m exactly surprised. It has long been my experience that many companies focus too much on just one aspect of supply chain risk. Typically, this has stemmed from a lack of clear ownership or the fact that people habitually focus on the one dimension of the supply chain that they understand the best.
To make matters worse, the credit crisis then smashed a big hole in what risk management procedures were actually in place. Many corporates were faced with some pretty stark cost cutting choices in the darkest days of the crisis and – quite often – resources for risk processes were sacrificed for the sake of immediate savings. Supply chain management was no exception.
What I believe is happening now is that businesses are not as aware of their supply chain risks as they would ideally like to be, whether regarding the fiscal health of their key suppliers or even the way in which the crisis has affected those suppliers’ quality controls. Many manufacturers for example were forced to trim headcount amongst non-engineering or production staff, meaning that their own risk management checks and balances will have suffered just like their clients’ did.
This recession looks like it will have a long tail; businesses will continue to be affected by aftershocks long after the economists tell us that recession is technically over. Suppliers which appear buoyant right now may well be holed beneath the waterline. With this in mind, the emergence from recession does not spell an end to our woes. It merely signals the start of a period during which we discover just how deep the pain inflicted by the credit crisis has run.
The full extent of this damage is something which I feel many companies will be unaware of right now, due to the way in which their own procurement and supply chain teams have been trimmed. This can leave them dangerously exposed to the risk of an imminent supply chain failure. In addition, many will look just to their biggest suppliers for any obvious signs of pain, believing that the larger the supplier, the larger the impact. This is a mistake as the smallest supplier of the smallest component can cause just as much disruption as the largest supplier of the largest component. Imagine for example the impact on a prison of a problem with its locks supplier!
Some large global businesses, with a heritage of exemplary supply chain management, have already felt the impact of this. Therefore I cannot help but wonder just how great the problems could be within other large organisations which don’t have that background or experience in supply chain management.
It may only be a gut feel but I’d be prepared to bet that in any large stock market index of, say, 200-250 top companies, there will be at least ten who could be struggling with supply chain issues right now.
This is a problem that is only going to get worse. As healthier companies emerge from the recession and refocus their sights on a growth agenda, there is likely to be a flurry of new products brought to the market, across all sectors. This will place yet more strain on already beleaguered supply chains.
If problems do come to light, they will probably be down to failings in the overall system of managing supply chain risk rather than the failing of an individual component or supplier. That’s why I would suggest that businesses looking for rapid, post-recession growth should be giving some serious thought to re-investing in those risk management processes, bringing them back up to full strength as soon as possible.
Even if a business were able to quickly deal with the operational fall-out of an individual failure within the supply chain, the damage to reputation and brand can haunt that business for far longer. It’s worth remembering that perception is key; being perceived to have a shaky, unstable supply chain is something no business wants to be associated with.
If companies are going to think long and hard about their supply chain management, the issue of ownership must be addressed. This is a perennial issue; not something which has only come to light because of the recession. Recession is a platform for change though – so here’s a chance to address it.
Far too many companies still do not have a single person in charge of supply chain risk. Instead, you often find multiple parties involved, each with their own area of focus. So, for example, the person with the engineering background focuses heavily on product quality or innovation with scant regard for the financial numbers while the person with the accounting background is the polar opposite. Often, the dominant personality in the group is the one whose agenda is championed most strongly.
I believe that supply chain risk could become the key business issue in the coming months; in exactly the same way that cash management became the issue that Boards obsessed about during the credit crisis. Just as with cash management though, lots of hard work will be wasted if there is a lack of alignment across the business. For this reason, businesses should have one person in charge of supply chain risk; someone to run the agenda, to be crystal clear on all aspects of the risk strategy and to very clearly own that strategy.
At this point in time, focusing on a single aspect of supply chain risk could be dangerous. There are just too many scenarios out there where an ailing supplier could wreak havoc on profitability in the short term and brand values and reputation in the long term. It really isn’t worth the risk.
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