GLOBAL LOGISTICS

h4-4 1 i ! I / f M
~f / I 1 f 1 1 / t-Ji
- -
tm
It
BY JOYCE KLINE, ACCENTURE
Supply chain risk has become
more problematic th a n ever be-
fo r e a n d th e increasing need to
penetr ate emerging markets is
only making th e probiem more
a c u te . Here are five br oad-r each-
ing steps shippers can tai<e to
establish a safety n e t.
market risk
M
ature home markets. M ore
and more widespread com-
petition. Downward pressure
on margins. Small wonder that com-
panies everywhere are thinkingand
actingmore globally. Pure and sim-
ple, global business is becoming every
company's reality.
Thousands of pitfalls line the path
to high performance in global opera-
tions. But among the most treacherous
is the need to understand and manage
risk. Then again, business is all about
risk. But with tbe advent of global
operationsand companies' growing
interest in emerging marketsrisk has
assumed a whole new dimension.
For example, risk is exacerbated by
limitations in physical infrastructure
(roads, ports, facilities, etc), which
are usually less developed in emerging
markets. Take India (one of the four
BRIC countries, along with Brazil,
Russia, and China), wbere transport
delays and inadequate cold storage
cause nearly balf of all domestically
May2007| WWW.LOGISTICSMGMT.COM
LOGISTICS MANAGEMENT 41
Emerging markets, continued
Increased inventories
and safety stock
Forward buying/hedging
strategies
Developing
I
Sourcingof contingent
suppi iers and/or i ogis-
tics providers
Forrmi r isl( tnuiagertEnt
program
EstabI ishing an inten-
tionaily geographical ly
distr ibuted supply base
Mature
Figure 1 : A continuum of suppiy chain
risk-mitigation approaches.
grown fruits and vegetables to rot before
delivery.
Political structures and policies
also enhance risk, since they're nearly
always more restrictive in emerging
markets. Even in the European Union
(EU) supply chain risk is elevated
because cabotage (intranational trans-
port) is zealously controlled. Haulers
based in one EU country usually are
not allowed to travel between points
within another EU country.
Or take China, which periodically
imposes licensing, health, technical,
and packaging restrictions that put
foreign companies at a disadvantage.
China recently released a draft regula-
tion requiring "one dealer license, one
product" in the auto sector, effectively
preventing newcomers from using
existing distribution channels and
giving domestic manufacturers more
time to prepare for direct competition.
Figuring out how to surmount these
risks is core to the challenge of global
operations.
But risk has another, even more dire,
component: anticipating and respond-
ing to unanticipated calamities. In a
recent column in Logistics Management
(www.logisticsmgmt.com), we profiled
a 2006 Accenture study on risk man-
agement and mitigation. The results
were sobering: Seventy-three percent
of companies have experienced supply
chain disruptions in the past five years.
Of those, executives at nearly 32 per-
cent said it took more than 'one month
to recover and 36 percent said it took
between one week and one month to
recover.
The vast majority (94 percent) said
the disruption affected profitability and
their companys ability to meet cus-
tomer expectations. Fifty-six percent
said the impact on customer expec-
tations was moderate or significant.
The report also identified the source of
most upheavals and the frequency with
which they were cited by respondents:
Poor performance of supply chain
partners (38 percent).
Volatility of fuel prices (37 percent).
Natural disasters (35 percent).
Inability to deal with logistics
capacity or complexity issues (33
percent).
Inaccurate plans and forecasts (30
percent).
The bottom line is twofold: Supply
chain risk has become more ubiqui-
tous and problematic than ever before,
and companies' increasing need to
penetrate emerging markets will only
make the problem more acute.
REFINING THE STRATEGY
A company's first-tier response to
global risk should be obvious: develop
and refine a global operating strategy.
That strategy must begin by confirm-
ing the primary reason for addressing
an emerging market. Is it to find new
On both sides, selling and sourcing, the
key is aligning market-entry objectives
with the supply chain characteristics that
typify each country or region. What works
in Brazil may not work in China.
sources of supply? Increase revenues
by attracting new buyers? Introduce
new products or product lines?
If the objective is to increase rev-
enues by tapping hot new markets, it's
essential that the company understand
on a market-by-market basis the readi-
ness and appropriateness of its prod-
uct portfolio, logistics channels, make/
buy approaches, and sales/marketing
support functions. If the goal is new
sourcing opportunities, the make-or-
break factor could be the right sourc-
ing model: Work with trading agents?
Form local joint ventures or wholly
owned foreign enterprises? Build
international procurement offices? On
both sides (selling and sourcing), the
key is aligning market-entry objectives
with the supply chain characteristics
that typify each country or region.
What works in Brazil may not work in
China.
The above generalities may be use-
ful up to a point. But they don't speak
to the specific issue of risk. In its most
recent (2006) study of global opera-
tions, Accenture found that the global
operations strategies of most compa-
nies were not developed with specific
attention to managing supply chain
risk. Three-quarters of the survey's 300
respondents noted that their companies
have not fully integrated risk-mitigation
with their global operations strategy.
Ten percent have done nothing what-
soever. In addition, more than half of
the survey respondents stated that their
global operations strategies have actu-
ally increased supply chain risk. Only
13 percent said that risk dropped as a
result of implementing/upgrading their
global operations strategy.
So what are the right ways to mini-
mize the risks associated with emerg-
ing markets? And what is the right way
to make those approaches part of an
evolving, continuously improving global
42 LOGISTICS MANAGEMENT WWW.LOGISTICSMGMT.COM | May 2007
Emerging markets, continued
operations strategy? Natu-
rally, there are hundreds
of individual steps that can
be taken to reduce supply
chain risk.
However, research by
Accenture has identified
five of the most far-reach-
ing and significant. As
shown in Figure 1, each
resides on a continuum of
"supply chain maturity,"
1
Increasing inventories and safety
stocks is a viable and widely
practiced option. However,
it's also' a buffer strategy that's typi-
cally employed by companies seek-
ing a foothold in an emerging market.
And it can be costly, and therefore
less likely to align with the company's
broader inventory management objec-
tives or the wishes of its C-suite,
2
Forward buying/hedging strategies
also can mitigate risk by ensur-
ing the cost-effective acquisi-
tion of needed products and materiel
from emerging markets. However, a
forward buying and hedging strategy
must be evaluated in light of each spe-
cific purchase. Acquiring supply-con-
strained materials such as titanium
will likely be viewed as strategic. But
hedging on a more readily available
commodity would likely be an inap-
propriate risk-abatement solution,
3
Building contingency relation-
ships with additional suppliers or
logistics services providers is often
a good way to prepare for potential dis-
ruptions in supply, unless it somehow
detracts from companies' valued rela-
tionships with current supply chain part-
ners. However, this is not a simple short-
term initiative, nor is it easy to undo.
New relationships increase agility
and potentially reduce risk, but they
take time. The key is ensuring that pro-
spective partners are highly qualified,
and that their supply chain processes
are compatible with those in place
at the companies that engage them.
Take the case of a leading high-tech
company seeking to maintain opera-
tions in the wake of the Indonesian
tsunamis. Strong contingency relation-
ships enabled it to move supply and
Risk-Mitigatioii Strategy Maturity | Strategy i Strategy DeeiiEd l Strategy Deeiipcl ' Effectiveness
Level i in Place ' Effective i Ineffective : Gap
INCREASED INVENTORIES AND SAFETY STOCK
FORWARD BUYING/HEDGING
SOURCING CONTINGENT SUPPLIERS
FORMAL RISK MANAGEMENT PROGRAM
GEOGRAPHICALLY DISTRIBUTED SUPPLY BASE
1
2
3
4
5
43%
54%
42%
48%
40%
46%
57%
54%
52%
49%
39%
50%
27%
42%
27%
+7
+7
+27
+10
+22
Figure 2: Responses to a 2006 Accenture study on Supply Chain Risk Manage-
ment. Survey recipients were asked: "Which of the foliowing processes do you
have in piace to identify and mitigate suppiy chain risks, and how effective
have they been?"
production from its Asian operations
to alternate venues in North America
and Europe, At no time did this shift
impact the company's customers,
4
Further along the continuum is
the development of a formal risk
management program that clearly
defines and prescribes a company's
range of responses to a potential dis-
ruption. In simplest terms, this involves
the development of a structured, inte-
grated "resilience life cycle" across
which companies:
Identify and categorize risks,
Monitor threats,
Circulate information and alerts,
Develop mechanisms for mini-
mizing the effect of disruptions,
Prefabricate and enact potential
responses,
Develop mechanisms for recover-
ing in the most rapid and efficient way
Measure performance and develop-
metrics for continuous improvement,
5
The most "mature" example of
supply chain risk mitigation is an
intentionally geographically dis-
tributed supply basethe operative
word here is intentionally. Many com-
panies seek to develop an extended
supply chain in order to reduce cost and
maintain competitiveness. As a result,
suppliers in emerging markets are often
targeted. However, the qualification
process can be long, and ensuring cer-
tainty of supply is always challenging.
In the high-tech and aerospace
industries, for example, supplier quali-
fication can take 12 months or more.
Another challenge associated with dis-
tributed supply bases is the more com-
plex (and potentially more expensive)
circulation of material for assembly
or point of use. Simply put, emerging
markets and intentionally distributed
supply bases are poster children for
the design of insightful, innovative
global operations strategies,
INTEGRATING MITIGATION
It is interesting to note that Accen-
ture-researched companies haven't nec-
essarily enacted the five practices in the
same sequence we have just described.
As shown in Figure 2, forward buying/
hedging is used more widely than the
"less mature" practice of increasing
inventories and safety stock.
Yet both have the narrowest
"effectiveness gap"the difference
between those companies deeming
the practice effective versus ineffec-
tive, Cenerally speaking, however,
the more mature practices have been
enacted by fewer companies and
have a significantly higher level of
perceived effectiveness.
In net, every emerging market and
every supply chain strategy has its own
cadre of risks. Though there are hun-
dreds of responses, most are mirrors or
subsets of the five strategies we've just
discussed. We should also highlight that
companies bent on high performance
develop their global operations strate-
gies knowing that built-in risk manage-
ment programs are critical. These com-
panies balance their emerging market
objectives against the related (and doc-
umented) risk. In fact, it's often high
expertise, high expectations and, most
of all, high levels of preparedness that
make them high performers.
Joyce Kline is a senior manager in the
Accenture Supply Chain Managem.ent
Strategy practice. Based in Boston,
she can he reached at joyce.s.kline
accenture.com.
44 LOGISTICS MANAGEIVIENT
WWW.LOGISTICSMGMTCOM | May 2007