SUPPLY CHAIN: On the move

Uncertainty regarding import tariffs and rising costs of doing business in China, along with the disruption of COVID-19, has made many organisations question their reliance on suppliers. This has led them to begin sourcing elsewhere in Asia (in countries such as Taiwan and Vietnam) for key components and manufacturers for their products.

Organisations have found that on-shoring or near-shoring will offer greater stability and predictability in the supply chain. Similar to on-shoring, near-shoring refers to the process of setting up production close to national borders, often within the same region or continent. Though the apparel and electronics industries may be leading this effort, others will be broadening their sourcing horizons beyond China shortly as well.

Though on-shoring, near-shoring, and diversifying the supplier base within Asia are often thought of as moves to de-risk the supply chain, sourcing from new areas can also present new risks. Some of these are common in places where an organisation has not previously sourced from. There is no track record with these new suppliers, and it can be difficult to gauge their financial health and strength of their quality processes, and preparedness for events such as natural disasters. This can be particularly true in countries such as Vietnam, where factories are often owned by overseas firms, making it more difficult to monitor the management policies and processes that will apply to an organisation’s supply chain.

Other risks are more specific to the new countries where companies are choosing to source from. Countries such as Vietnam and India (another popular choice for those looking to move their supplier base from China), generally have worse road, rail, port, and airport infrastructure than China, making it more likely that shipments will be delayed or damaged in-transit.

Warehousing capacity is also likely to be in shorter supply in South and Southeast Asia, increasing the risk that product will be stored in substandard and insecure locations.

Other risks may be more evident at the country level. Most major cities in India are in high-risk areas for cyclones, for instance, an exposure only present for China’s coastal cities. In other areas of risk, such as theft, suppliers in countries such as Mexico or Brazil face much higher risk than their Asian counterparts.

Companies that are on-shoring or near-shoring their supply chain operations may be doing so in part to reduce the distance their products must travel in order to reduce in-transit risk. While this logic is sound in many cases – there is much that can go wrong on the 30 or so days it takes to move sea cargo between Asia and Europe – there are unique in-transit risks even within the Americas and Europe.

In Europe, for example, the presence of stowaways in cargo has been a chronic problem for truck shipments, often causing the spoilage of food and pharmaceutical loads. In the Americas, border delays have hampered export shipments from Mexico and bureaucratic export processes can make sourcing in Brazil difficult. Fortunately, none of these problems make anything impossible and can be overcome with careful planning and due diligence.

When sourcing from a new country, companies should develop and apply a comprehensive risk assessment process to help surface potential issues with new suppliers. This should take into account both factors specific to the supplier, such as financial health, and country-level factors, such as natural disaster exposure, as well as the company’s risk tolerance.

Once a risk score is assigned, companies can prioritise procurement audits (whether in-person, or more recently, virtually) to get eyes on the suppliers’ policies, procedures, and practices.

Companies should go beyond vetting manufacturers to consider risk throughout the supply chain, including in transportation and logistics and component or raw material suppliers. BSI often sees companies that have completed appropriate due diligence on the manufacturer only to suffer major disruptions due to unforeseen transportation-related problems. It is particularly important to understand and assess any subcontractor relationships your logistics suppliers may have, as this is where BSI most often sees issues arise.

Working closely with suppliers from the beginning of the procurement process makes it easier to drive continuous improvement throughout the relationship with the supplier.

Gaining an initial understanding of how the supplier operates will make it easier to provide recommendations and quick fixes as issues arise and help establish an open communication channel with the supplier. There are often warning signs of supplier problems – such as a minor security incident or quality issue – that can metastasize into larger, supply chain-halting issues if not caught quickly and corrected. Establishing early warning systems and good communication with suppliers can help avoid these issues and make companies feel secure in their decision to move their supply chains beyond China.

This article was published in the September-October 2020 issue of CIR Magazine.

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