The supply chains of some of the world’s biggest groups have been hit in recent years by events as varied as factory fires in Bangladesh, tsunamis, horsemeat contamination in food products, strikes, droughts, floods and volcanic ash clouds.
The effects on businesses around the world – and therefore on the returns of their investors – have been profound, yet, “until a few years ago, most people in the financial community did not even know what a supply chain was,” says the CEO of a US-based investment house that runs a portfolio of companies it has identified as having superior supply chain management, who did not want to be named.
The range of these effects is so big – and hits so many different sectors of the economy – because “we live in the most complex, interdependent era in history and business is becoming ever more global and immediate,” says Stefano Tranquillo, vice-president for northern Europe at FM Global, a supply chain risk management group.
A laptop, for example, “can have components sourced from 39 different countries and be put together in a 40th,” says Jennifer Bisceglie, president of Interos, a supply chain consultancy that has just launched a Global Threat Information Center (GTIC) to help companies identify their supply chain risks better. “There are two types of organisation – those that have been hit by supply chain disruption and those that do not know they have been hit,” she adds.
“The last decade has seen the expansion of supply chains to a global level, and more recently an increase in the global scrutiny of these supply chains due to growing global digital connectivity,” says Richard Stathers, head of responsible investment at Schroders. “In addition the impact that economic growth and an increasing population are having on ecological systems means that environmental factors are playing an increasingly prominent role in supply chain management.” About two-thirds of the cost structure of many groups is located in their supply chains, according to risk management association Airmic, and economic losses from supply chain disruptions are estimated to have increased 465 per cent between 2009 and 2011.
Despite this, some companies have a limited knowledge of their supply chains, says Adrian Chamberlain, CEO of supply chain management group Achilles. “It’s not unusual for a very large multinational to overestimate the number of suppliers they have by 30-40 per cent.” Many companies have only recently woken up to the risks within their supply chains, Mr Stathers adds. “The complexity of supply chains means that most supply chain management programmes are only just dealing with tier 1 suppliers and the ability to look through and manage relationships further down the supply chain is only just being explored.”
In addition, in the face of recession, pressure on margins and demand for cheaper products from consumers, “many companies have not treated their suppliers well,” Mr Chamberlain adds.
The US automotive industry is a perfect example of this, says the anonymous investor. “Companies were saving money by squeezing their suppliers on costs. They became more and more dependent on those suppliers, which were becoming less and less capable, often as a result of what the automotive company was doing to them.”
His firm has for several years been running a portfolio based on companies with superior supply chain management “and that has outperformed nicely”, he says. At first, he tried to persuade companies with poor practices to improve, but “getting a big enterprise to change its ways was very difficult, so now I just want to know if the company is doing a good job or not,” he adds. “If value is destroyed by bad supply chain management, then it can be added by good practice.”
There is evidence of this in the food sector. After the horsemeat scandal that struck retailers all over Europe earlier this year, Tesco CEO Philip Clarke was forced to apologise to customers and vowed to “create a supply chain that customers can understand and have confidence in”.
Meanwhile, fast-food chain McDonald’s was able to say “at no time has there been any suggestion of horsemeat in our burgers”, adding “all of our beef is traceable, from the British and Irish farmers we buy from to our restaurants”.
Agribusiness supply chains have seen “an incredible transformation in the last 10 years,” says Justin Sherrard, global strategist at Rabobank, as the sector has moved from an era of surplus to one of scarcity.
The increase in demand for meat and dairy as a result of emerging market growth has led to the industrialisation of supply chains. Many people believe that the inevitable result is a scandal like the horsemeat affair. “You can see it as a simple case of supplier dishonesty of the type that will always happen,” says Mr Sherrard. “Or you can see it as an example of how supply chains can really fundamentally break down when you have such an acute focus on price and so little apparent interest in other issues.”
Relationships need to change so there is much closer co-operation along the supply chain, Mr Sherrard adds. “In the past, supply chains were organised step by step so the downstream end had very little information about what was happening upstream and vice versa. There has to be a flow of information from one end of the supply chain to the other.”
Many companies are seeking to map their supply chains and benchmark their risks in order to have greater transparency – and events such as the tsunami in Japan and floods in Thailand have focused attention on the need for greater diversity in supply chains.
There are key points to consider in making supply chains more robust, says Bruce Proctor, head of Global Trade & Supply Chain Finance at Bank of America Merrill Lynch. “You need flexibility – do you have the ability to react to unexpected events? There must be a periodic re-examination of supply chain links because things change all the time. And you need to look at how management of these risks is embedded in the company. It needs to be an important part of senior management responsibilities.”
Investors can help to ensure that this is so. “There is no downside to investors putting pressure on investors to improve in this area,” says Ms Biscegle, while Andrew Underwood, head of supply chain at KPMG, says that if investors were not interested or aware of the risks in the physical supply chains of their investments in the past they are now.