Risk cannot be an afterthought

After a series of corporate controversies, Alexandra Brintrup, a supply chain specialist, explains what companies can do to plan for risks in advance. The World Economic Forum’s Building Resilience in Supply Chains report has just been published.

2012 was another tough year for supply chains. Risk continued to be a focal point as a fire in the Bangladesh Tazreen factory disrupted the US garment industry, and strikes in ports in Los Angeles shut down shipping operations for several days. Many companies, including Toyota, announced new risk management plans.

Provenance was once more high on the agenda as the supply chains of several companies caught up with them. Apple had to face the less than pleasant working conditions in one of its contractors, Foxconn. Counterfeit bottles of Chateau Lafite in China made the headlines. Meanwhile, Oracle, British Telecom, JDA Software and others announced new, cloud-based solutions to manage the vast amounts of data global supply chains must create and (hopefully) share.

There is an underlying theme in all of these – it seems that the need to know where one’s stuff comes from is gaining urgency. And I mean not only immediate suppliers, but the suppliers of those suppliers, and their suppliers, all the way to the bottom of the chain.

If the actors in a supply chain are visible, companies can plan for risk in advance, for example by identifying alternative means of production, keeping stocks on high-risk products and forming alliances for recovery. They can even insure against disruptions in their supply chains.

Latest research shows that when we draw bigger pictures and zoom out from the neat two or three-tier sketches, what we find is surprising: the picture is not that neat anymore. A global company could be embedded in a map of tens of thousands of suppliers, who not only supply to the company itself, but to each other as well – creating complex interdependencies with firms acting on multiple tiers and engaging in lateral or reciprocal supply relationships. The apparent complexity in the big picture forces us to re-think the speed and magnitude with which local issues and disruptions can cascade through these networks of seemingly unrelated, but indirectly connected companies.

Much of the technology for achieving visibility is there. RFID tags, wireless sensor networks, smart phones and cloud computing can all help, but several factors prevent companies from adoption. Visibility of the chain can only occur if all companies share the cost of adopting compatible technology and are willing to share information regarding their suppliers and customers. The naïve suggestion would be putting legal and costing frameworks in place, and aligning incentives so that companies can share information, provided there is a safe and reliable means of doing so.

But this rarely happens. Information equals power, and power is not distributed equally in supply chains. Sometimes risk is at best a checklist and at worst an afterthought. So can it really happen? Can we really have visibility over extended supply networks?

Alexandra Brintrup is a supply chain resilience expert at the University of Cranfield in the United Kingdom. Find out more about the World Economic Forum’s Supply Chain Risk Initiative here.

Image: The burnt interior of garment factory Tazreen Fashions, after a devastating fire in Savar, Bangladesh. REUTERS/Andrew Biraj