Supply chain disruption

DEPARTMENTS Forward Thinking [SUPPLY CHAIN NEWS AND RESEARCH RESULTS FROM AROUND THE WORLD] Weather is wreaking havoc on supply chains SUFFERING A SUPPLY CHAIN DISRUPTION? More than likely, the blame can be assigned to adverse weather events, such as a tornado, flood, or windstorm, according to the results of a global survey of supply chain organizations. Research conducted by Switzerland's Zurich Financial Services Group and the United Kingdom-based Business Continuity Institute found that the most common reason for a supply chain disruption in 2011 was bad weather, cited by 51 percent of respondents. The two groups canvassed 559 companies from 14 different industries in 62 countries. As outlined in the report Supply Chain Resilience 2011 Study, 85 percent of respondents had suffered at least one supply chain break in 2011. After weather, unplanned telecommunications and information technology outages was the next most-common reason for a disruption, cited by 41 percent of survey takers. There was a tie for third, with 21 percent listing transport-network disruptions and an equal percentage citing an earthquake and/or tsunami. Most of those (20 percent) were affected by the March 11, 2011, earthquake and tsunami in Japan. Although adverse weather was the number-one cause of disruptions in most of the industrial sectors surveyed, manufacturers cited product quality incidents as the leading cause of disruptions, followed by an earthquake and/or tsunami. The consequences of a supply chain break can be severe for an organization, the survey results suggested. When asked what impact such a disruption could have on affected companies, 49 percent of respondents said that it results in a loss of productivity, and another 38 percent said it increases operating costs. Thirty-two percent said disruptions cause a loss in revenue. Such losses can be substantial: 17 percent of the respondents said the financial costs of the largest single supply chain disruption they experienced in 2011 amounted to 1 million euros or more. The survey also found growing concern among respondents that corporate cost-saving initiatives were exposing their supply chains to risk. Seventy-four percent of respondents either agreed or strongly agreed with the proposition that just-in-time, lean, and outsourcing practices made their supply chains more vulnerable to a disruption. Sixty-five percent of respondents also agreed or strongly agreed with the statement that the shift to low-cost suppliers, such as in China, has increased supply chain vulnerability. Finally, the survey found that most organizations are not prepared to handle a severe disruption. Only 8 percent of the respondents were confident that their suppliers had a business continuity program in place specifically to respond to supply chain ruptures. In their conclusion, the study's authors recommended that companies take into account “resilience considerations” when assessing a supply chain's operational efficiency. Companies should analyze supply chain incidents and update their planning assumptions as a result of that analysis, they wrote. However, since “responsibility for resilience” cannot be outsourced, companies should have their own business continuity program in place to deal with a supply chain failure. Many retailers ignore hazards of returned merchandise A SURPRISING VARIETY of consumer goods contain hazardous materials, but retail employees who handle returned merchandise often are unaware of the potential hazards inherent in some of the items they receive, store, and ship back to warehouses. As a result, they may unknowingly violate laws and regulations while putting their companies at risk for penalties, lawsuits, employee injury, and property damage. Most people recognize that products like household cleaners and solvents are likely to contain potentially dangerous chemicals, but they may assume those products don't require spe cial handling because they'rein consumer packaging. Retail associates, more over, may not think of items like light bulbs, health and beautycareproducts, aerosols, some medicines, and batteries as hazardous. Other potentially dangerous items include most consumer electronics, which may contain lead and mercury as well as lesser-known toxins, and used power equipment that's returned with fuel, oil, or volatile vapors inside. Even regulated products that were properly packaged, documented, and handled when shipped to a retailer's distribution center often aren't recognized and treated as hazardous when consumers return them, according to Jack Currie, administrator of the Council on Safe Transportation of Hazardous Articles (COSTHA). That's partly due to a lack of awareness among store associates—typically a high-turnover, part-time, or seasonal position that may be overlooked when companies conduct hazardous materials transportation training. As a result, customer service or stockroom associates often toss hazardous (and frequently incompatible) items in any handy cardboard box or returnable tote and send them back—undeclared, unprotected, and often mislabeled—to a warehouse or distribution center, thus putting those employees and facilities at risk of injury and property loss. Thanks to retailers’ increasingly liberal returns policies and the shrinking life spans of consumer electronic devices, the amount of hazardous consumer goods in the reverse logistics stream is certain to increase. One way retailers can address this growing problem, experts say, is to ensure that anybody who could be called on to handle returned consumer goods— whether at a customer service desk, in a stockroom, in transportation, or at the warehouse—receives job-appropriate safety training. [HIRING OUTLOOK IMPROVES FOR SUPPLY CHAIN EXECUTIVES] THE OVERALL ECONOMIC PICTURE may still be uncertain, but the outlook for those seeking supply chain positions appears to be positive. Just under half of the 430 respondents in United Kingdom-based eyefortransport's Global Chief Supply Chain Officer Strategy Survey 2011-2012 report said that their companies currently are recruiting supply chain professionals. That's a notable increase since 2010, when a similar study found that only 35 percent of respondents’ companies were looking for recruits. Respondents were located in North America and Europe. The vast majority of survey respondents—89 percent— said that the perceived business value of the supply chain had increased within their companies during the economic downturn. Still, only 56 percent said that “supply chain head” either already is or would become a board-level position in their company within the next two years. One thing that didn't change since last year was respondents’ difficulty in getting an accurate view of demand. For the second consecutive year, demand variability (that is, forecasting) was the number-one challenge cited by respondents; this year, 49 percent put that at the top of their list. The second most-frequently reported challenge was cost containment and reduction, cited by 42 percent. Escalating customer requirements and inventory management and optimization, cited by 39 percent, tied for third place. Supply Chain Quarterly wins national design awards FOR THE FOURTH consecutive year, CSCMP's Supply Chain Quarterly has been recognized for excellence in graphic design. The Quarterly won two 2011 Graphic Design USA awards: one for its 2011 special “State of Logistics” issue and another for the Quarter 1/2011 issue of the publication. The trade magazine Graphic Design USA sponsors the annual American Graphic Design Awards. Director of Creative Services Keisha Capitola also received American Graphic Design Awards for her work on CSCMP's Supply Chain Quarterly in 2010, 2009, and 2008. Water worries ADD WATER to the list of things most supply chain managers probably don't worry about but should. Two-thirds (66 percent) of the 190 organizations that were studied for the second annual CDP Water Disclosure Global Report issued by the Carbon Disclosure Project (CDP) said exposure to water-related risk could have a potential impact on their supply chains in the next five years. One-third of the respondents, in fact, said their companies have already suffered water-related business impacts. Water-related business impacts include disruptions to operations from severe weather events like floods or water shortages. The CDP noted that in 2011, some of the worst droughts in decades have hit regions of China, East Africa, the Middle East, and the United States, causing crop failures, production cutbacks, and other difficulties. Quite the opposite has been true in parts of the Pacific Rim. Recent flooding has inundated Thailand, including the business capital, Bangkok, while Queensland, Australia, earlier this year had its prolonged drought alleviated by once-in-100-years floods, leading to severe supply chain disruptions throughout the region. What makes procurement groups best-in-class? A GLOBAL PROCUREMENT STUDY conducted by the consulting firm A.T. Kearney found that leading procurement organizations “excel at risk management by anticipating, tracking, and planning mitigation strategies” covering a wide range of threats. They do so by using risk-impact analysis, financial risk management, and formal disaster planning. For the study, part of its latest Assessment of Excellence in Procurement report, the consulting firm gathered input from 185 companies across 32 different industries. Eighty percent of the respondents considered their companies to be vulnerable to a major supply disruption. In its analysis of the study's results, Kearney identified 13 of the responding companies that consistently demonstrated a high level of procurement performance. These best-in-class companies had a number of practices in common. In addition to excelling at risk management, they aligned procurement strategies with the overall goals of their companies. They also worked closely with their suppliers to improve new-product development, reduced time-to-market for new products, and created new business opportunities to boost revenues. Other leading practices included supplier relationship management processes, tailoring category strategies to particular situations, and “more forward-looking” approaches to recruiting and retaining supply chain talent. They also tended to be more advanced than other companies in their adoption of technology. One other interesting finding was that more than 50 percent of respondents plan to increase their sourcing of products and services from China, India, and other Asian countries over the next three years. Although the survey did not specifically ask respondents for an explanation, study author Alejandro Ferrer said his belief was that companies were still expecting a “significant cost differential” between Asia and other sourcing locations. [IKEA SAYS, “PAPER, PLEASE"] IKEA, the Swedish homegoods and furniture retailer, is giving up wooden pallets in favor of paper platforms. The retailer reportedly uses 10 million pallets annually worldwide and expects to save 10 percent on transportation costs by making the switch. “We don't know if the paper pallet will be the ultimate solution, but it's better than wood,” Jeanette Skjelmose, sustain-ability manager at Ikea's supply chain unit, told Bloomberg News in November. Skjelmose said the corrugated-paper-board pallets are able to support a load of 1,650 pounds. The pallets will only be usable for a single, one-way trip and then will be recycled. Because the paper versions are smaller and 90 percent lighter than their wooden predecessors, Ikea expects to save nearly $2 million annually by reducing the number of truckloads and containers it ships. But it will also have to spend nearly half that to purchase card stock and new forklifts, the retailer said. Ikea is placing a big bet on paper pallets; wooden pallets will be gone from the company's system by January 2012. The question now: will the cost savings from one-way paper pallets outweigh the benefits of multiple-trip wooden pallets? This is not the first time Ikea has tackled packaging. The company developed “loading ledges"—flexible platforms made from recyclable polypropylene plastic that expand and contract to the size of the load. It has also reduced packaging in order to fit more items on pallets and in trailers and containers. GLOBAL TRADE AND CONTAINER FLOW INDEX [GLOBAL TRADE TRENDS DOWN AS LOCAL CONSUMPTION SLOWLY GROWS] GLOBAL TRADE LEVELS declined by 1.3 percent in Quarter 3 of 2011 while domestic consumption continued to grow. The Global Trade Flow Index highlights a growing gap between trade levels in mature and emerging markets as well as a switch in position for the United States and China, with China taking over the top spot (Figure 1). With European countries in the G7 heavily affected by the eurozone debt crisis and constrained by an appreciating euro, trade levels fell by 2 percent. Trade declined by 2 percent quarter-over-quarter in the United States, where a weak dollar dampened foreign market growth, and rising commodity prices further reduced domestic consumption. Japan, still recovering from the effects of the March 2011 earthquake and tsunami, saw trade decline by only 1.6 percent in Q3, an improvement over the 5.7-percent drop at the end of Q2. As a result of these falling trade volumes, growth in container flows also slowed in Q3 (Figure 2). Emerging markets, meanwhile, did somewhat better. India and China's trade levels grew 1.2 percent and 0.4 percent, respectively. India's rebound from -4.5-percent growth in Q2 was led by demand for cars, petroleum products, and precious stones. Overall, gross domestic product (GDP) in the BRIC countries (Brazil, Russia, India, and China) continues to grow, up between 2.7 and 3.5 percent in Q3. These increases were not directly reflected in global trade flow levels, suggesting that locally manufactured products and services have been displacing some import volumes in these regions. Moving into Q4 2011, we expect the traditional end-of-year holiday upswing to boost global trade flows. Inflation, driven by high food prices and volatile commodity markets, continues to be a risk for both emerging and developed markets. However, the biggest risk overall continues to be financial market instability related to the eurozone's sovereign debt crisis, followed by ongoing U.S. fiscal imbalances. For more about Capgemini Consulting's trade information services, contact Dan Albright, Vice President (dan.albright@capgemini.com), or Bryan Garcia, Managing Consultant (bryan.garcia@capgemini.com).