Age of globalisation brings added risks

PUBLISHED : Saturday, 20 September, 2008, 12:00am
UPDATED : Saturday, 20 September, 2008, 12:00am

Supply chain management is now far more complex and buyers need to co-operate with suppliers every step of the way

The era of globalisation has brought major changes in sourcing patterns and supply lines in virtually every industry, prompting the need for companies to assess the potential impact of additional risks and to develop new levels of management expertise and greater general awareness.

'The supply chain is becoming more complex and part of the strategic agenda,' said Anthony Lucas, a PricewaterhouseCoopers (PwC) partner for advisory services. 'Management of risks, especially in the retail and consumer sectors, is becoming an increasingly important issue. The key thing is not just knowing your supplier but understanding how they run their whole business.'

Certain well-publicised incidents, for instance in the toy business, had highlighted the sort of problems that lay in wait for the unwary or inattentive. Even so, Mr Lucas noted that in sourcing goods or materials around the world and depending on far-flung manufacturers, too many companies still had an incomplete view of the scale of risks involved.

Typically they tend to focus too narrowly on pet head office concerns or exercise insufficient rigour in applying audit and quality assurance processes.

'In particular there is the issue of traceability,' he said. 'Initially, when companies set up sourcing arrangements and contracts [with a preferred supplier], they are reassured. But, increasingly, they also need to know what their suppliers' suppliers are doing.'

Two recent PwC studies on global sourcing strategies and managing supply chain risk had helped to identify where companies were concentrating their efforts and where they were falling short. Specifically, the results showed that businesses sourcing from the Asia-Pacific region still saw product quality as the number one risk. Next were concerns about logistics arrangements and the ability to supply on time. In third place were reputational risks, relating to anything from labour practices and intellectual property to human rights or corporate social responsibility.

'But even well-known organisations said their ability to keep a handle on risk across the supply chain is still quite underdeveloped,' Mr Lucas said. 'Many companies do not have a completely integrated framework for managing the total risk. People are in silos, only looking for example at contract negotiations or logistics issues.'

The way forward, he suggested, was for buyers to co-operate much more actively with suppliers every step of the way. In some cases, that might mean rationalising the supplier base to collaborate more effectively and promote the concept of partnership.

In others, it might be a matter of examining and assigning a risk factor for every component of the supply chain, including political, pricing and competitive factors, and using these to monitor performance plus long-term risk and reliability.

'There should also be an emphasis on quality audits and personnel to observe what is actually going on,' Mr Lucas said. 'Technology cannot take the place of an experienced person walking around looking at the processes on site. I would say the vehicle trade does that well now, but some [companies in other industries] are still quite naive in the whole process.'

He is encouraged to see that more multinationals are recognising the need to train up in-house staff at their procurement hubs to conduct or supervise detailed audits of sourcing, production and logistics processes. For this, it is essential to have people who not only understood the supply chain from end to end, but have product-specific knowledge of electronics, chemicals or garments sectors for example.

Finding staff capable of matching this profile is not easy. However being prepared to recruit, train, provide local and overseas experience, and compensate them well is sure to pay dividends in the long term, according to Mr Lucas.

'The whole thing about managing quality and risk should be a core part of your business and you should try to bring it in-house,' he said.

'Companies that embed it in their internal processes will do better.'

He added that one of the challenges for multinationals, which might have thousands of suppliers, was being able to keep effective tabs on all of them. To improve monitoring and controls, some were therefore seeking to 'cluster' suppliers in certain locations. In this way, trained audit and quality assurance personnel could maximise their productive time and were not stretched too thinly across the region.

It also meant that inspections of whatever type could be more than a cursory 'health check', and that the underlying business relationship with suppliers could shift from purely transactional to being far more collaborative and built on strengthening mutual interests.

Noting that some third-party logistics specialists were now offering pre-shipment inspection and quality assurance services for manufactured goods, Mr Lucas advised caution.

'We would say that they are good at looking at logistics but other things may fall out of scope,' he said.

'To do the job properly you need the technical competencies and the cultural sensitivity. You need specialists to look at supplier contracts, products, and to be aware of all the risks. [That requires] emphasis on training and developing proficiency.'