With little accurate global data on suppliers, buyers are exhibiting ‘blind faith’ in lower tiers of their supply chain. Poor visibility at tiers two and three is exposing those who source globally to risk and potential brand damage that should deeply concern any board, as well as company shareholders. Adrian Chamberlain writes.
Business is now global. Corporations are not only sourcing an ever greater proportion of their products and services internationally but are manufacturing on a truly globally basis, often using networks of niche players that collaborate across widely dispersed geographies.
Products may now be designed in one location, built in another and assembled from components sourced from anywhere in the world.
Service companies too are following clients into new markets and are increasingly reliant on local suppliers that are relatively, or even completely, unknown quantities. With a significant and growing proportion of trade conducted through such global supply networks – often involving several tiers of suppliers – it must be asked: How well do companies know their suppliers, their suppliers’ suppliers and those at a tertiary level – and just how compliant are those suppliers?
Findings from new research conducted by Achilles and IFF Research – ‘Procurement Trends 2013’ – indicate that three quarters of UK businesses use suppliers outside of the UK, with 77% of companies with a turnover of £1bn+ believing that supply chains will become more globalised in the future.
However, despite this growing dependency on overseas suppliers, companies appear ‘blind’ to the dangers that exist within international supply chains. The Achilles report reveals that over half (53%) of businesses using international suppliers are not fully confident in their supply chain in overseas countries and some 61% of organisations that procure outside the UK do not feel their supply chain helps them to identify and mitigate risk.
Furthermore, one quarter (23%) of UK companies said they are not confident in their database of overseas suppliers.
This trend towards greater use of international suppliers when coupled with the low confidence of buyers in their ability to identify and mitigate risk suggests a latent complacency within corporate purchasing departments – a situation that has all the makings of a ‘perfect storm’.
Blind faith in suppliers that have the potential to negatively influence brand and shareholder value through their actions – such as by breaching ethical working practices, using child labour, poor adherence to health & safety requirements, or having premises that are non-compliant with fire regulations – is courting immense danger.
“Black Swan” events, such as the recent collapse of an eight-storey garment factory in Savar, Bangladesh, where more than 1,000 people died, serve to illustrate the tragic human costs and the huge risk to brands when sourcing from suppliers where there is poor compliance to fire regulations and improper building certificates and controls. The results are clear to see in the damaging press coverage for some 40 global fashion and retail brands, including Matalan and Primark.
We are starting to see the consequences of this within the investment community. Already, 31 funds have called, via an Oxfam campaign, for the top 10 global food businesses to manage risks in their supply chain to protect shareholders’ investments. It comes after the horse meat scandal alone wiped an estimated £300 million off the value of Tesco.
Many recent incidents were caused by suppliers deep within the supply chain. But while most companies know their tier one suppliers and are careful to monitor compliance at this level, are they aware of what is happening further down their supply chains, at tier two and three? Are those relationships visible to the buyer? And are buyers active in mapping their supply chains down through the tiers?
Poor visibility of supplier data has the potential to impact shareholder value. If an incident occurs and it transpires that checks on supplier information and compliance are found wanting, consumer confidence in a brand can be quickly destroyed. In a complex global network of suppliers and sub-suppliers, poor visibility is an issue that is causing increasing anxiety amongst senior executives. Findings from the Achilles survey suggest that only 16% of companies hold the same level of information about tier two suppliers as tier one suppliers.
According to Achilles’ research, one in five (18%) companies in the UK holds absolutely no information about their tier two suppliers across the world.
The Achilles report shows that nearly 40% of companies rank risk to reputation in the top three most important risks to manage and yet, 61% of organisations that procure outside the UK do not feel their supply chain helps them to identify and mitigate risk.
Conversely, a recent study by analysts, Aberdeen Group, almost two thirds of companies put a high priority on improving supply chain visibility. The report says some 63% of 149 companies with predominantly global supply chains have ranked supply chain visibility as a high priority for improvement.
An organisation that operates globally needs globally available information. The ‘Holy Grail’ for international businesses seeking to mitigate supply chain risk is to create a single, centralised global source of accurate and validated supplier information, one that stretches down through all tiers of the supply chain, and is visible to procurement teams across all geographies.
Many global companies want the same consistent processes and standards for all operating units and wish to use a consistent approach to managing supplier information in order to create transparency and facilitate benchmarking of supplier performance. Comparisons of a supplier’s performance across several regions may well be useful for creating continuity within complex global operations and may reduce the potential for individual buyers to introduce inconsistencies at a local level through cosy relationships with suppliers.
The worldwide up-take of broadband connections and the advent of cloud technology have now placed this Holy Grail of procurement within the grasp of just about every business.
It is no longer necessary for a company to invest in large servers of their own – computing power can be purchased as needed and scaled to a company’s growing requirements. Connectivity on a global basis is now easily achieved, allowing both small and large companies to centralise supplier data and offer access to that data from anywhere in the world through a simple web browser. Enterprises need no longer be constrained by their legacy systems and suppliers, including SMEs, are free to compete in a global marketplace on a level playing field.
Corporate confidence in cloud technology is gathering pace and a clear vision of its future role for global business is unfolding. Gartner predicts the public cloud services market will grow 18.5% in 2013 to a total of $131bn worldwide, with some $677 billion to be spent on cloud services globally between 2013 and 2016.
Cloud technology lends itself to the easy sharing of information, worldwide, and offers the perfect environment in which to create collaborative communities. This is particularly true within the procurement space.
As many buying organisations from within an industrial sector buy from the same suppliers, it makes sense to ask for supplier information just once, and to validate that information for all in the community.
Doing this collaboratively cuts costs and takes the ‘chore’ out of managing individual data bases – not to mention the time and effort it saves suppliers in filling in multiple PQQs. For suppliers too, joining a global community will open up a shop window to the world.
Outsourcing the management of supplier information to a specialist, independent organisation that uses a global cloud based platform to manage collaborative communities, opens up a world of opportunities for improving data accuracy, streamlining processes, mapping supplier relationships at all tiers and reducing exposure to supply chain risk.
However, despite the poor confidence of procurement professionals in the ability of their supply chains to identify and mitigate risk, the Achilles survey finds that 81 per cent of businesses keep procurement in-house and over 90 per cent are satisfied with existing systems. With the trend to source more on a global basis and to create increasingly complex supply networks, such blind faith in internal systems to mitigate escalating risk appears misguided or even complacent.
Achilles has worked with hundreds of companies across the globe. Almost always the senior managers of the procurement department have been shocked at the poor quality of their own data, when they had believed it was significantly better than it really was.
Invariably, there is great disparity in the integrity of information held across multiple databases. Errors creep in and the more data bases there are, the greater the likelihood of inconsistent and errant information. Worryingly, the Achilles research finds that 47 per cent of companies have multiple supplier databases.
Leading international companies are moving to centralise their supplier information by outsourcing to a specialist. We are also seeing whole industries move to consolidate supplier data on a global scale through cloud-based collaborative communities.
The need for collaboration
In the automotive sector a new initiative has just been launched to not only gather supplier information and verify it, but to co-operate on a mapping tool that cascades invitations to suppliers at all tiers in the chain. Creating visibility of suppliers throughout a multi-tiered supply chain will give participants the ability to identify issues as they arise and to take corrective actions swiftly.
Launched by three of the world’s leading car manufacturer,s the initiative promises an “automotive community open to all”, aimed at creating ‘collective protection’ from risks in their supply chain.
Three international car manufacturers have been working with the owner of Goodwood, Lord March, and Achilles, to develop a three-stage process that identifies and manages potential risks in the chain by combining an online portal for supplier information, using a standardised set of questions, as well as a supply chain mapping tool, and a financial analysis model, which serves as a ‘financial health check’ on suppliers.
The impact on global automotive supply chains from two major natural disasters in 2011 – the tsunami that hit Japan in the March and the extensive flooding in Thailand the following October – highlighted to the world’s car manufacturers the weaknesses and vulnerability deep within their supply base. For many, the extent of the problem did not become apparent for some weeks as small, outwardly inconsequential, suppliers at lower tiers of the chain failed to supply the higher tiers. The OEMs subsequently felt the collective impact of a host of suppliers being unable to deliver simultaneously.
A common problem for the industry was poor visibility of suppliers beyond tier one. Prior to 2011 OEMs were reasonably content to leave responsibility for risk assessment of lower tiers to their tier-one suppliers. That has all changed.
Centralising supplier data within global communities and on behalf of global industries creates the visibility needed to mitigate supply chain risk – in whatever form it takes and wherever it occurs.
Using the new global, cloud based platform developed by Achilles, businesses are in a position to configure reports in the way they want and are able to undertake their own risk assessments based on rich, highly qualified and up to date information, clear in the knowledge that the data they are using has been validated by specialists and experts in managing supplier information.
Managing global supply chains will become far simpler and far less risky if buyers and suppliers learn to embrace the potential of globalised supplier information. The opportunity is there for the taking.
Adrian Chamberlain is CEO of Achilles