Supply chains: Striking the right balance

In January, over 20 risk managers based in Singapore and Malaysia and from a variety of different industry sectors, met virtually to discuss supply chain risk. The roundtable, hosted by StrategicRISK in partnership with FM Global, considered the main lessons learnt from the COVID-crisis. 

The sudden closure of China’s borders had a profound impact on global trade in early 2020. According to the Business Continuity Institute, three out of four businesses reported that their supply chains had been adversely affected as a result of the country closing down in an attempt to halt the spread of the disease.

The World Economic Forum has predicted supply chains will reshape following the pandemic. Not only has COVID-19 and resulting lockdowns revealed the fragility of modern supply chains, it had led to a fundamental rethink of globalisation. There is an urgent need to design smarter, stronger and more diverse supply chains, according to WEF.

Supply chain automation

The pandemic has reaffirmed the fact that logistics and manufacturing sectors in particular need to automate. Nearly three quarters of supply chain organisations view technology as a competitive sources of advantage, according to Gartner.

Roundtable participants agreed, saying that greater automation of the supply chain will be an essential and ongoing trend moving forward. By leveraging technology, from robotics, data analytics and IoT, trading systems should become more reliable and resilient and less prone to disruption and downtime.

Jeffrey Toh, business risk consultant, Asia Pacific for FM Global asked for feedback on the types of resources most needed. “At FM Global we offer free analytics tools which are available for everyone and our Resilience Index is there to help rank your own business as well as help you make more informed choices. It can help you understand your different suppliers, their locations and infrastructures - do they have natural catastrophe or emerging cyber exposures, for instance?”

“Going back to fundamentals would involve building knowledge around your supply chains,” he added. “We need to assess what we already know and perhaps more importantly, understand the gaps that exist in our knowledge. Plugging these gaps would be key to managing any supply chain risks.”

Efficiency at the cost of resilience

Roundtable participants were in overwhelming agreement that going forward, a new balance would have to be struck between efficiency and resilience. Lean manufacturing techniques, including just-in-time, now need to make way for ‘just-in-case’ approaches, building more slack and contingency into the process for when the worst happens.

For some risk professionals, this means it is important for the organisation to stockpile some of its most essential components.

“Stockpiling” of a different type stretched supply chains to their limits in March 2020, particularly within the food and drink industry. As pandemic fears took over, there was a spike in panic-buying for what were deemed to be supermarket essentials, including toilet paper, rice and noodles.

In Singapore and other parts of the region, pictures circulated on social media showing empty shelves in some stores. The Trade Minister Chan Chun Sing urged for calm, saying there was “no risk” of running out of essential food and household items, and the supplies were soon replenished.

Learning from the panic-buying experience, many retail businesses are now keeping more stock on standby.

In November in the UK, as ahead of Brexit and another country-wide lockdown, Andrex maker Kimberly-Clark announced it had over 100 million rolls of toilet paper held in warehouses around the country.

Sourcing alternatives

Some respondents said they had been focusing more on business continuity planning (BCP), ensuring that contingencies were in place if certain scenarios arose, such as the loss of a key supplier.

Suppliers should be asked if they also have BCPs in place during the tendering or RFQ process, thought Satpal Singh Dhillon, chief governance and risk officer of transportation and logistics giant PLUS Malaysia Berhad.

“It is important to understand the supply chain and map it out. Typically the key processes involved in a supply chain include sourcing of raw materials, delivery, storage, manufacturing and finally sales.”

“It’s imperative for us to perform a supply chain risk assessment and map our suppliers in the context of ‘ability to substitute’ as well as ‘level of disruption, following the pandemic’. If suppliers are going through high disruption, then you immediately need to start look for alternative suppliers, alongside the ability to use alternative products.”

“If you are not able to that, you have to kick in a your crisis plan to be resilient,” he added. “One way of doing this is to deep dive into contracts with suppliers, and understanding key terms and clauses, because if your supplier is disrupted and not able to deliver, it’s really going to affect your supply chain process.”

Doing appropriate due diligence is critical to manage risks and asking the right questions, Singh Dhillon explained.

“One of the things we’ve done is that when we engage a new supplier, is we ask how they manage their supply chain, where they get their raw materials from, who are the parties they’re working with. Additionally we take necessary steps to investigate the financial position and stability of prospective suppliers. It’s a red flag if a party posted losses for four quarters in a row.”

Poor visibility

As is often the challenge with supply chain risk, the lack of transparency beyond the first tier of suppliers is a major hurdle to overcome. While a main supplier may tick all the right boxes, it is not as clear cut whether they could be impacted by a supplier of raw materials further down the chain.

The pandemic has once again revealed the challenges in gaining visibility into the entire supply chain ecosystem.

Research carried out by McKinsey last year found that while companies can work with their tier-one suppliers to create transparency, this is impossible in instances where those suppliers lack visibility themselves. This leaves risk management teams doing all the detective work, it pointed out.

A full report of the highlights from the virtual roundtable discussion will be available in the Q1 2021 edition of StrategicRISK, which is due to be published at the end of March.