Keeping it together
Written by Nick Martindale
Nick Martindale considers the impact of the downturn on supply chain capabilities
The global economic recession has brought about a greater focus on risk for many organisations, and consumer goods companies are no exception. With just-in-time delivery models removing any margin for error, ensuring goods arrive in store on time - and to the quality and ethical standards expected by consumers - is crucial.
For many firms, this means the focus has shifted from ensuring their own operations are working effectively to assessing suppliers' business continuity arrangements and monitoring their performance.
PricewaterhouseCoopers (PWC) at the start of 2010 found that 35 per cent of CEOs from consumer goods firms said they were either "extremely" or "somewhat" concerned about the security of their supply chain, placing it above issues such as terrorism (25 per cent) and only marginally below pandemics and other health crises which would affect the ability of consumers to shop at all (41 per cent).
In 2009, music chain Zavvi provided a powerful reminder of the consequences of failing to address the issue of supplier viability, plunging into administration when the collapse of its supplier Entertainment UK - the distribution subsidiary of Woolworths - meant it missed out on the crucial Christmas trading season.
"We have a good process internally - what happens if there's a fuel strike or if there's bad weather - but we need to make sure that if we invoke our plan then third parties are flexible enough to accommodate that," says Peter Morris, business continuity coordinator at Debenhams. "Similarly if they have an incident we need to be confident that they can continue to provide either a service or the goods that they supply in a sustained fashion," he adds.
Primary responsibility for this kind of vetting of suppliers and their capabilities remains with procurement and merchandising departments, he says, as they have the primary relationships with suppliers. "They know the words to use within that environment," he says. "But I can make sure they ask certain questions so we don't get exposed."
Nor is it just the ability of suppliers to continue trading that risk departments must focus on, says Mike Osborne, managing director of ICM Business Continuity Services.
"Companies that have enquired into the plans of their supply chain partners may have found that in the last 12 to 24 months smaller companies have cut back on their business continuity provisions," he says. "This raises the risk profile of the whole supply chain and may have gone unnoticed."
Operating a global supply chain also brings with it inherent risks, even in better economic times; not least that of damaged goods. "We get our products from Europe and the Far East and deliver them to Europe, Africa and the Middle East, so it's a wide range of regions," says Erik Claes, head of internal audit at Daikin Europe. His firm's approach to this is to work with the right partners from a financial and operational perspective, he says, and to reduce the number of warehouses in the logistics network, delivering directly to customers where possible. "The fewer times you have to handle the product the smaller the risk that it will be damaged," he says.
Having a global network of suppliers also creates the possible risk of piracy, particularly around the Somali Gulf area, says Paul Howard, head of insurance and risk management at Sainsbury's. "But as well as having more global sources of supply you also have more local areas of supply," he adds. "You're probably dealing with a larger number of smaller suppliers, which in itself has some interesting continuity issues."
Beyond the supply chain, the recession has also sparked a greater awareness of the risks consumer goods firms themselves face, such as freak weather, protests or strikes, being heavily dependent on the ability of customers to get to stores.
"The recession has made organisations far more aware of the mundane, everyday risks that can have crippling consequences on normal business operations," says Keith Tilley, managing director UK and executive vice president, Europe, at SunGard Availability Services. "Issues as foot and mouth, fuel crises, bomb blasts, pandemics and more have all been part of the continuity programmes of the most forward-looking retailers."
The downturn has also created further challenges from a risk perspective by altering the competitive landscape, adds Howard. "There have been a number of locations that we've been able to pick up," he says. "There's not just the acquisition risk but the integration risks of the colleagues who were working in those stores and are now coming into the Sainsbury's family."
Consumer goods firms also run very real risks - both operational and reputational - in the areas of sustainability and climate change. In PWC's risk survey, 44 per cent of CEOs in the consumer goods sector said they were concerned about this threat and 61 per cent said the recession had had no impact on their investment in this area. Only eight per cent had reduced spending.
"Ten years ago it was more around reputation risk management but more recently it's been seen as a threat to security of supply," says Teresa Fabian, director, sustainability and climate change at PWC. "Some of our more forward-thinking clients are asking us to develop scenarios for 2020 or 2025."
A recent survey by consultancy AT Kearney and the Carbon Disclosure Project - a global initiative designed to encourage organisations to identify and reduce their carbon emissions across the whole of their supply chain - confirms this shift in attitude. Risk management was a driving force for 59 per cent of members when developing a climate change strategy, making it the second biggest factor behind greater efficiency (71 per cent) and ahead of motivations such as improving the brand (41 per cent) and reducing cost (38 per cent).
Closely linked to this is the reputuational risk that comes from engaging in unethical practices such as child labour. This is a particular issue for consumer goods companies as many products are manufactured in low-cost countries and often involve extended supply chains that can be difficult to monitor. The unwanted publicity that can arise from such situations can have a devastating effect on a brand, as Primark discovered to its cost back in 2008 when three Indian firms were found to be sub-contracting embroidery work on dresses to underage home workers.
"We just don't entertain it; we have people who go out on site and make sure that our clothes are being produced in an acceptable fashion," says Debenham's Morris. "Apart from it just being unfair, it's not very good business sense."
There are other perils, too, that threaten consumer goods firms in particular. A recent survey by AT Kearney highlights the danger of imposters producing substandard counterfeit replicas of established brand names, with one incident costing an average of anything between two and 15 per cent of yearly revenues. The melamine incident - when the toxic chemical found its way into milk and dairy products in China - in 2008 highlighted the risk companies face, either from replicas of finished goods or core components further down the supply chain.
Like many organisations, consumer goods firms also have complex IT requirements where high levels of uptime and effective backup facilities are essential. A particular challenge is maintaining an online presence and delivery network. "We've seen such a massive increase in online trading that those systems have got to be red-hot because if you don't deliver on that then it's very visible," confirms Morris.
Many companies are turning to cloud computing and managed service solutions here, says Tilley at SunGard, which have the added attraction of coming out of operating expenditure rather than as a capital investment, meaning such costs can be kept off balance sheets.
Going forward, a greater focus on risk, both within and beyond the immediate business, is likely to be one of the legacies of the current global downturn, says Osborne at ICM. "Suppliers are being asked to share their plans with customers and collaborate in the preparation of wider planning and testing to ensure that the supply chain can withstand a disruption," he says. "In the modern consumer goods industry, companies are only as strong as their weakest link."