The rapid and continuing change to global and local supply chains means that very few businesses remain untouched by ever more complex risks. But can this change be managed? Angela Faherty reports.
Graham Burdis: The large Swiss insurance company ACE Group recently published its Emerging Risks Barometer for 2015. The top three risks were technology risk (43 per cent), supply chain risk (31 per cent); and regulatory and compliance risk (27 per cent).
Interestingly, supply chain risk was actually number one in the last barometer in 2013, so it has slipped down a bit, but it still rates very highly. The study found that businesses were less concerned about disruptions such as natural disasters but were really concerned about reputational risk and brand risk. Has this become a recent focus?
Peter Hearl: It has probably been heightened because a lot of companies now are international in nature and the multi-dimensional nature of supply chains these days is so complex that you just don’t know where the next surprise is going to come from. A lot of this is to do with human factors. I was living in the US when the Exxon Valdez spewed all the crude oil into Alaska. Where you can hurt people, either physically or emotionally or hurt the environment you face huge risks. Society has changed to the point where those things are front and centre in people’s minds. I don’t think that a lot of companies do a lot of real due diligence on where the next surprise is going to come from.
Graham Burdis: Why are directors putting up with these risks?
Peter Hearl: I think it probably gets blurred in with a lot of their other governance issues. I also think that risk, in many companies, is buried within the audit committee and is not separate. I’ve sat on boards where it’s combined with audit so you tend to focus on financial stuff as opposed to operating risk. It is when it is a separate operation or separate activity that it really gets higher focus.
Robert Wright: It depends a lot on the nature of the business. A number of businesses can, to a certain extent, rely on third parties for supply chain whereas others are much more involved with their supply chain and have much more risk in relation to the implications. The business I’m in, which is retail, our supply chain has changed dramatically over the last 10 years. Years ago you were dealing face-to-face with the supplier who tended to be local and was responsible for product and had their own brand name associated with that product. Now retailers have their own brands and the whole structure of the supply chain has changed. Now you’ve got to design the product, manage the quality assurance and contract manufacturing of the product. It’s often in a different country and you’ve got to think about consolidation, shipping, transport and warehousing. There’s a major process change in the structure of the supply chain.
Peter L. O’Brien: To add to Robert’s point, I think one of the fundamental answers as to what has changed is the market has become much more global. Everyone is now working on a level playing field, whether they like it or not ,and Australia is still struggling with that compared to other countries.The big issue is that boards are struggling with getting their head around the pace of change and the global dimension, which their businesses are now exposed to, and operating in. This raises questions about the core business model and who they partner with and how much visibility they have around other partners in the supply chain and if they don’t, it creates a risk to their own business. It’s a completely different landscape today than it was five years ago.
Owen West: It is not only about the structural changes, but the visibility of issues when they occur. The issues have probably always occurred, but social media has made a huge difference to reputation and brand risk, and your supply chain, whether you like it or not, does represent your brand.
Graham Burdis: What should boards and directors be looking at?
Robert Wright: One of the key risks in the supply chain these days is the planning and forecasting process within the supply chain. Unless you can plan and forecast and manage the inter-relationships of all the various parties, then you can have real problems. I think that’s where a lack of infrastructure plays an important role.
Chris Pitts: Globalisation means we have all become interconnected and interdependent on each other and that’s what the issue is today. It is a case of supply chain competing against supply chain, not just company against company, and the question is, how do you manage supply chain risk?
Andrea Staines: I think every company, except perhaps those that are selling right at the front line to retail customers, has two supply chains to consider. One is the incoming materials for its production and the other is the supply chain that is then taking their product “out”. It might be the mines looking for coal and iron ore to be taken overseas or it might be a manufacturing plant looking to export a manufactured good. I think it is a case of country supply chain against country supply chain now and Australia has to ensure that its supply chains are not only resilient and functioning, but that they’re incredibly efficient, because if our supply chains have bottlenecks that are adding costs to our export movements, and that is happening, all of a sudden our exports to Asia aren’t as competitive with South American exports to Asia.
Peter L. O’Brien: I’m not sure I’m convinced that we’re talking about country supply chain in terms of country against country. If you look at the likes of Brambles or Macquarie Bank, their biggest challenge at the moment is whether they base themselves out of Australia because the market is so small it has become constrained when considering future growth. You will probably find that the brand for many Australian companies will be operating out of key growth markets such as the US, Europe or Asia in the not too distant future. There’s probably a good half a dozen to a dozen Australian corporates that are being challenged with exactly this issue of competing globally. Seafolly is a terrific example of a wonderful Australian swimwear business and brand, where today the only thing they do in Australia is design because it’s an Aussie icon. Everything else from manufacturing, sourcing, sales and marketing is done outside Australia. This is the challenge for Australia and its company directors: how do we ensure Australian companies remain competitive on a global stage?
Graham Burdis: What can Australian companies do to ensure they stay ahead of the game?
Chris Pitts: I think there’s a tremendous opportunity for Australian companies. I spent 10 years moving manufacturing to China. I’m passionate about adding value locally. It is an opportunity for boards and companies. We do have some good Australian companies that are innovative, but I think innovation comes through the process of minimising risk and finding the value proposition.
Owen West: It is also about analysing your supply chain to ensure the playing field is actually level and makes issues like buying out of China more manageable. It is about understanding the risk better.
Peter L. O’Brien: The BRIC economies are growing in wealth and are actually becoming the single biggest consumer markets driving explosive growth across nearly all industry sectors. Danone, for example, about five or six years ago recognised that it actually needed to have most of its people operationally located in Asia.
This is because for a product like baby products, if you take India and China alone, it completely destroys the other parts of the world in terms of volume demand. It is about connecting demand with supply and everything in between being the “end-to-end” supply chain. If Australian companies don’t become more creative and innovative, they are going to become potentially less relevant.
Peter Hearl: The big economies like China and Indonesia have long-term goals to become totally self-sufficient. They want to become like the US was years ago where they produced stuff and sold stuff locally.
Andrea Staines: I’m a little more hopeful about value-add manufacturing. Yes we’ve hollowed out most areas, but as agribusiness grows, I think there’s potential for part of agribusiness production to be done in Australia. For example, the Chinese are paying a premium for the safety and the transparency and quality control and production of dehydrated milk in Australia. I’m hoping that we can actually introduce or hold on to some value-add in our premium branded and premium-priced product.
Peter L. O’Brien: I would love to be optimistic about it, but there’s an element of me that’s pessimistic about manufacturing in Australia and our ability to compete on a number of levels across the “end-to-end” supply chain.
This is what worries me the most. Having the opportunity to advise boards in Australia, this is probably the one thing that concerns a large number of directors generally across all industry sectors. A lot of the concern is directly related to the speed upon which companies and their supply chains are being impacted and disrupted across the globe – at a pace that is scaring those who see it happening.
Graham Burdis: What supply chain risks keep directors awake at night?
Phil Garling: Quality, cost, safety, timeliness.
Peter Hearl: Quality is a huge thing, particularly if you’re in the food or beverage business. If you have a quality issue people won’t put stuff in their mouth that they think is going to hurt them.
Robert Wright: There’s been a large movement, particularly in food, for the major food manufacturers to have third-party assurance programs. So if you’re a supplier to a major food processor, then you have to go through a certain accreditation and assurance program to make sure that the products you are supplying are of a high standard.
Chris Pitts: I worked for HP in the early 1980s and they were the market leaders in quality. The way they handled it was by taking the approach that you cannot force companies to implement quality controls. However, they would send their engineers out to their suppliers to help them to get their manufacturing processes correct. That’s what you need to do. You need to look at the whole supply chain, not just what’s coming in and your own processes.
Owen West: I know certainly when I was in procurement we tended to think about the supply chain as only the first level. But now when we think about supply chain it’s about subcontractors and sub-subcontractors, who also represent your brand. So the risk in your supply chain goes all the way down through it and the quality processes therefore have to include the sub-subcontractors.
Robert Wright: If you can’t be assured of the quality of the product coming into the business, then you need to go back through the supply chain and make sure there’s an accreditation process.
Graham Burdis: Isn’t a key component of risk management in the supply chain evaluating the quantity of the risk? Isn’t that a financial risk?
Peter Hearl: Exactly. That should be done as part of the risk assessment.
Robert Wright: I think you need to think of how you manage risk within an organisation. Risk starts with strategy, when you undertake your strategy you should be identifying risks and risk should be integrated into the way business is managed. Risk should be an issue that gets discussed starting at strategy right through the budgeting and business planning process. And it should be managed within the management structure every month. Risk should be reviewed within the business as a continuous process.
Andrea Staines: I think there is a risk that if you do it monthly you only focus on amending the risks you’ve already identified, or the risks that are very much tied to daily operations. The good thing about maybe complementing it with six-monthly or annual risk reporting is that you can better identify new risks.
Peter Hearl: You should be able to measure what happens when things aren’t working properly. If you’ve got the right metrics, that should be part of the monthly review. In terms of reviewing the mitigating strategies to eliminate risk, that should probably be quarterly or six-monthly.
Phil Garling: My supply chain experience is mainly with projects rather than continuous manufacturing. On a one-off project basis it might make it easier to assess the logistics risk because it is just part of the total project risk so you assess it as one of the suite of project risks. But on the other hand, it makes it much more difficult because every project is different and you’re trying to anticipate the risks. An example is the Waratah trains project, where we built 78, eight-car train sets for the Sydney urban network. It involved a substantial supply chain. Eighty per cent of the manufacture occurred in China. The bogies [railroad trucks] were sent to Austria to get the gears fitted and then sent back to China. The stainless steel came from Korea because that was the only place in the world that made stainless steel of the specified quality. All the technology came from Hitachi in Japan.
But one risk manifested itself that I’m sure wasn’t on any risk analysis at all in the beginning. One of the trains was loaded in the hold of a ship from China to come to Australia. That ship hold had carried a chemical on a previous trip, that when exposed to salt air, turned to acid and when that train arrived you could poke a finger through the side of it. It was a complete write-off and resulted in a thirty million dollar insurance claim and one of the 78 train sets had to be built again. Now that won’t happen again when we build the next train. That will be a lesson learned at some considerable cost to the insurance company. But everything is new and you’ve got to start from scratch.
My view about this is you don’t actually separate that from the project risk. The logistic risks are just inherent risks of building the thing.
Peter L. O’Brien: These are real issues of complexity, but the backdrop to that is all about growth and how do we compete now that we’re operating on a global level-playing field? Boards are driven by profitable and sustainable growth, which requires you to look at expansion offshore because it is most likely that growth markets in most sectors are outside Australia. Therefore, it’s about also understanding and considering the future composition of the board from an “end-to-end” supply chain perspective.
Owen West: We’re all in agreement that supply chain issues are really important and the boards should be spending a lot of time on them, but then what’s next? How do you get traction on solutions that minimise supply chain risks?
Andrea Staines: Boards should be forced through the risk processes with the right tools because I do think sometimes the board does fail in getting risks discussed in the same breath as strategy.
Peter Hearl: I can’t see how you can get at this stuff unless you do give it equal and separate focus.
Robert Wright: I’m on the board at APA and we have the audit and risk committee as one committee, but risk as an issue gets reviewed separately. I don’t think there needs to be a separate committee providing it is actually addressed as an issue itself and not just the subset of the financial process.
Phil Garling: Both of my public company boards have got them combined, and we spend probably 50 per cent of the time on non-financial risk aspects. The auditors are making a significant contribution in the non-financial aspects as well.
Graham Burdis: Clearly separating the risk element is a good idea, but so are good relationships with suppliers. Directors have to be across it, you’ve got to go out to the places and meet the big suppliers.
Peter Hearl: It is important to understand both sides of the relationship.
Andrea Staines: I think Australia is starting to look more broadly for global benchmarks and better practice. I think that’s something we need to do more of. I’ve worked/lived abroad like almost everyone in the room and when you do come back to Australia you see there’s not enough looking outside, but that is changing.
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