In simple terms, a business is its supply chain. The dependency on others is total, covering relationships with government, regulators, education, research and suppliers of products, services and logistics.
This extended chain has been identified by many as being a major source of risk to sustainable business performance.
Every link is liable to fail and even though the individual statistical probability is very low, the impact of such a failure cascaded through the supply chain may accumulate into a major disruption further down (and/or up) the line.
Extending chain increases risk
The economic dependence of a business on its suppliers is massive; the rule of thumb is that external purchases for materials, components, services and indirect supplies are 55% to 60% of revenues. In some cases this will be very much higher and can even exceed 90%.
The drive for globalization was driven by the development of low cost sources of supply, giving significant economic advantage to buyers, and they were able to increase profits directly or reduce prices in order to drive market share, volume and as a result, still net higher profits.
A major consequence of this dash for lower cost has been to increase the level of risk present in the supply chain. The dollar value of international sourcing is compelling but the risks can be substantial and may not always have been addressed. The financial motivation has generally been the winning driver in strategic terms.
Increasingly complex supply chains
It is wrong, however, to think that risk is exclusively associated with global sourcing and trade. Rather, it is global sourcing and supply that has brought the issue into sharp focus. The underlying theme is burgeoning complexity in our supply chains. For example:
- Channels of customer demand with internet trading and e-fulfillment expanding rapidly alongside heritage routes to market
- Product and service variety increasing exponentially and creating, in turn, additional complexity and risk arising from conflicting demands on capacity
- Outsourcing of logistics and supply, with companies engaging a wider variety of services
- Consolidation and specialization of sourcing and supply taking place to secure economics increasing, irrespective of whether it is off-shored or global
In reaction to these threats, many organizations are now moving production or seeking suppliers closer to home, in what is being termed by some as a “re-shoring” movement. This subject will be the subject of a two-part article that will be published next week on the blog.
There will always be inherent risks associated with business. When considering extending the already-fragile supply chain for financial gain, business continuity best practices simply demand evaluating whether the increased risk is worth it.
By Professor Alan Braithewaite, Cranfield University and LCP Consulting
Read the White Paper by Professor Alan Braithewaite, "Supply Chain Recovery is a Competitive Capability".