Black Swans Causing a Rethink on Global Supply Chains?

A fair percentage of academicians and corporate supply chain experts agree that running supply chains “lean and mean” with just in time processes is the optimum approach. However, Black Swans (low probability events with high impact) such as the March 11, 2011 Sendai earthquake and subsequent tsunami have companies rethinking how they source to deliver the products and services critical to success.

The 8.9 magnitude earthquake and tsunami that ravaged Japan’s coast and cascading Fukushima nuclear calamity have severely tested the links in today’s global supply chains. And while it’s true that some Japanese electronics and automobile manufacturers continue to struggle with factory shutdowns, most global supply chains weathered the storm quite well. However as supply chains arguably become more complex, executives should reconsider how man-made and natural disasters can affect processes in delivering goods and services to market.

A Financial Times article titled “Industry Left High and Dry” cites how some companies were not prepared for the repercussions of Japanese factory slowdowns or shutdowns. These enterprises relied too much on Japanese factories to produce critical electronic components, and others simply lacked contingency disaster planning. Even more disturbing, Barry Tarnef, a risk manager at US insurance group Chubb says; “Many manufacturers (lacked) the information needed to mobilize alternative arrangements quickly (when their supply chains were interrupted).

One of the themes that I have highlighted over the past 2-3 years is with the global integration of trade, capital, information and labor over the past decade; few people understand that our world is more tightly connected than ever before. In a highly inter-dependent environment, small mistakes can have large ramifications. And even larger events – such as tsunami, volcanic ash and the like can cause an earnings miss or worse depending on the severity and criticality of the event.

That’s why companies are starting to re-consider their global supply chain processes. This means structuring alternative supply networks, adding regional suppliers (instead of relying solely on one country), and doing a better job of setting up an IT infrastructure capable of linking suppliers and providing supply chain visibility from “field to fork”.

Black Swan author Nassim Taleb has long counseled companies to consider concepts of robustness and redundancy to build flexibility in response to adverse events. However, these considerations surely add additional costs, and many companies from retailers to manufacturers are already relying on paper thin margins.

One thing is for certain, there are no excuses for ignorance of how your supply chain processes work – or don’t work. The supply chain that weathers today’s storm may be wholly inadequate for tomorrows.

Question:

* For supply chains, should companies continue to “go lean” or build in redundancy? What are your thoughts?

Supply Chain Traceability – What’s in Your T-Shirt?

Does it concern you that cotton from a t-shirt originated in Uzbekistan? You might care if reports are true that cotton harvested from this country came from forced or child labor. In fact, consumers are increasingly asking manufacturers and retailers to ensure goods and services are produced with sustainable and ethical business practices. With goods processed between countries and multiple supplier touches, traceability in the supply chain is more important than ever.

Consumers are becoming more and more interested in the make-up of products they’re buying. The ability to trace products through the entire supply chain—whether from field to fork or source to consumer—is becoming a competitive weapon for some companies, especially if they can authenticate then promote goods produced with sustainable business practices.

A Financial Times article cites that ethical spending has increased significantly in the past 20 years. As an example in the United Kingdom, “The amount of spending and investment influenced by ethical considerations almost doubled between 1999 and 2008 to reach £36 billion.” The FT article mentions the growth of fair trade and certified organic products as part of this growth trend. And fellow DailyFix author, Ted Mininni, says these types of goods, “are increasingly being added to retail assortments”—and in growing numbers!

However, one of the major challenges for both retailers and manufacturers alike is authenticating ethically sourced products. There’s more to the process than taking the supplier’s word for it.

In the case of organic bananas, the FT article notes, “the food company Dole labels each of its organic bananas with a three-digit number that, when entered on its website, reveals details of the farm where that banana is grown.” Identifying where a banana is sourced, however, is simple compared to such products as sweaters or t-shirts that pass through multiple suppliers and countries.

In “The Elephant and the Dragon,” author Robyn Meredith confirms that products often “zigzag” through the global supply chain from factory to factory. “A cheap toy may be assembled by parts from 12 different factories,” she says. And something as sophisticated as an automobile might contain five to seven thousand parts.

Fortunately for marketers, the challenge is not beyond the capabilities of today’s technologies. Some progressive companies are engaging in a purposeful effort to build effective policies (including auditing), technologies (supply chain analytics and infrastructure) and processes to track and monitor the extended supply chain.

Of course, implementing a data-driven supply chain infrastructure is only half the battle—supply chain managers, operations personnel and marketers must learn how to use it! Marketers, working alongside operations, will need training on the various tools and systems used to access data for reporting and query purposes. And marketers may also choose to make supply chain data available directly to consumers—similar to Dole’s web portal—thus enabling them to verify product origins for themselves!

Ethical sourcing, trade, manufacturing and retailing will continue to be a hot button for consumers. However, as seen from this article, jumping into this marketplace requires much more than just fancy signage and/or promotion. A real commitment to corporate responsibility and sustainable practices must be much more than lip service; it involves significant investment in people, processes, technology, and strategy. As seen from the complexity in supply chain traceability alone, it’s definitely not an effort a company should take lightly.

Questions:

• Does it matter to you how a product is made? Are you interested in the origins of the products and services you consume?

• The Financial Times article says that companies should make information about their supply chain public—or consumers will do it for them. Do you agree with this statement?