Risk and reward

Global supply chains are growing in complexity, and reputations depend on continuity of supply. The pressure is enormous to cut costs and improve efficiency without detracting from customer service, or undermine market responsiveness. But increased exposure to risks of disruption may have unintended consequences.

A risk survey by Marsh Risk Consulting found only 58% had evaluated the risk exposures that arise from the supply chain.

The effects of an interruption can be lost revenues, profits eroded, a tumbling share price and blemished reputation. Organisations should rigorously assess exposure to risk, Marsh advises, and consider insurance cover for more than just physical damage, specifically the cost of interruptions due to strikes and port disruptions. The Finnish port strike in May, due to a labour dispute in the Finnish food industry, saw 12,000 workers strike and threaten further action, for example.

The volcanic ash cloud eruption in Iceland has been causing significant inconvenience to air transport users across Europe, tightening demand in other transport modes. There are warnings that intermittent disruption could continue for months, or years, ahead.

Effective management of supply chains requires evaluating risk, and operational and financial impact. It is important to map the internal and external supply chain including services, and identify potentially critical failure points.

Companies will rarely quantify actual financial impact, but when this is done, strategies can be put in place to achieve an adaptive and resilient supply chain.

“A practical and pragmatic approach will achieve the comfort of continuity,” says Marsh consultant William Bruce.

The March earthquake in Chile was disastrous for pulp and paper mills some 5-10 miles from the epicenter.

Paul Johnston-Knight, director of UK-based paper agent Papico, explains that for integrated European pulp and paper mills the impact was not so great, but problems ensued for the vulnerable nonintegrated operations. Around 8% of market pulp originates in Chile and the result was a paper price hike on a scale unprecedented in the past 14 years. Between February 2009 and March 2010 price/tonne went from US$600 to US$900.

This, he says, should inspire companies to act: “Contingencies must be made. Mills buying on the spot market ultimately are affected by global natural events. There’s no fixed price. They pay the spot rate on arrival.”

To reduce the impact, the answer is diversification of sources. And a company looking for a stable supply chain must check up on the provider’s contingency plans and variety of supply.

“There are opportunities to steal a march on those who conservatively resource,” says Mr Johnston-Knight, who agrees with Marsh on the importance of suitable insurance cover.

He concludes: “The lowest price is not always the best. It reassures the customer to spread the risk. Decision makers have to weigh up making a quick buck against long-period return.”

Sharon Crayton, head of group marketing at Ardagh Glass, comments: “As a pan European company, we have an extensive Physical Risk Strategy in place, which is regularly tested and frequently reviewed by our key customers. We employ sophisticated product traceability systems and technology and adopt best practice management procedures in this area.”

Success does not come by going it alone. Ardagh’s approach is to partner with customers to achieve its goals in the most sustainable way, says Ms Crayton. “A good example is the recent investment in our Moerdijk facility in partnership with Heineken.”

At the plant, located in The Netherlands and considered one of the most efficient of its kind in Europe, a new glass furnace has almost doubled bottle production, with environmental and logistical benefits.

Stora Enso Carton Board’s Director, Sheeting & Supply Chain, Monica Pasanen remarks that being well prepared is essential business practice, both in-house and for its suppliers: “Shorter lead times and minimum inventories call for well-functioning logistics. Even though a worst-case scenario is an extraordinary situation for all parties, we think it is important to have freight companies, authorities, etc, prepared for these situations. Readiness and fast actions can mitigate the effects, as seen in this winter’s snow chaos in Sweden.

“But also we as suppliers need emergency preparedness and inventiveness and flexibility in order to serve our customers as well as possible. If logistics fail temporarily, loss of confidence can lead to financial effects. In the short run we might not be able to supply our customers. In the long run we risk losing confidence and customers might turn elsewhere.”

Ms Pasanen concludes: “We believe in creating good customer relationships based on dialogues with our customers. Here, efficient communication along the value chain is a key issue, so that all stakeholders can make well-grounded decisions.”