One of the UK’s foremost supply chain professionals has warned that supply disruptions are almost inevitable whenever you set up a new supply chain network.
This comes soon after recent high-profile turmoil in logistics management has put the nature of supply chain risk at the centre of media discussion.
Professor Richard Wilding OBE, CEng, FIET, FCILT, FCIPS, PFHEA, Professor of Supply Chain Strategy, Logistics, Procurement and Supply Chain Management, Cranfield School of Management, in a lengthy interview with Forward with Toll, outlined some of the major issues facing supply chain management and the pitfalls and challenges facing the sector in the modern era. He is Chairman of the Chartered Institute of Logistics UK.
All companies are faced with a myriad of challenges when considering new supply chain arrangements. These include doing due diligence, the tendering processes and risk management issues.
Wilding then stressed, “Whenever you switch on to a new supply chain network, you are going to have disruptions.”
Wilding pointed out how in modern supply chains, the ownership of elements within the supply chain is often diversified in a variety of organisations. There are four elements to a supply chain:
- Supply chain processes
- Infrastructure and equipment
- Information Systems
“These days within modern supply chains, often the ownership of those four elements is not within a single organisation. What you might have is somebody who supplies the infrastructure and equipment, somebody else who supplies you with the information systems, somebody else might supply the labour. It might be using various people,” explained Wilding.
He warned, “So, the processes have to cut across all of those organisations. So, when you are going from steady state into a new mode of operation, there are significant risks.”
Long-standing research has highlighted the problem for many companies of so-called ‘supply chain glitches’. A mammoth three-year project, carried out utilising data from the 1990s, suggested this phenomenon wipes significant value off a company’s shares, as reported in Logistics Bureau. Supply chain glitches are incidents which cause production and shipping delays. Research indicated that on the day a supply chain glitch is announced, an almost 9 percent drop in share price is observed. Interestingly, research revealed that in the 60 trading days before and after the announcement of the glitch, a loss of shareholder value of around 20 percent is observed. Avoidance of supply chain glitches prevents shareholder destruction and can result in substantial savings, study researchers indicated.
According to Wilding, around 10 percent of supply chains are disrupted in some form each year, suggesting this phenomenon is reasonably common. By way of example, he pointed out that there were some food supply shortages of fresh vegetables in UK supermarkets, including iceberg lettuces and courgettes, last year.
He highlighted how many different types of events can result in supply chain disruption. For instance, the Japanese tsunami and earthquake had affected the supply chains of a variety of high-profile companies, including Apple.
He added, “The key thing is thinking through how to manage that because it does have an impact overall and it affects shareholder value. It is not just the direct effect if your supply is disrupted, but these parallel interactions as we call them, which cause impacts on lots of different supply chains in a network.”
For Wilding, a key consideration when introducing a new supply chain network is the “handover” period. He suggests running two networks concurrently during this duration of time.
“An organisation must manage those two networks appropriately. So, what you may do for example is not have the new network for one operation and run the other network in parallel. For example, you might have half the country managed in one way, and the other half managed in another way during this handover period,” explained Wilding.
He cited the problems at Heathrow Airport’s at-the-time brand new Terminal 5, where the implementation of a baggage handling system reportedly caused a backlog of 15,000 bags to develop.
Wilding explained, “Basically, a baggage handling system is just an automated warehousing system. Instead of pushing goods onto lorries it pushes bags onto aircraft, so it’s the same sort of principle. If you remember, it took around about a week for that to stabilise and get sorted out.”
Some commentators suggest single-source warehousing can be problematic and creates pitfalls and challenges. However, this method remains quite common in some countries. Wilding highlighted its merits. He pointed out that a facility located within the so-called ‘golden triangle’ can deliver goods overnight to anywhere in the United Kingdom.
“Some large organisations have single facilities even for the whole of Europe from that particular location, and the challenge is your contingency planning and risk management strategy associated with that single facility. Real benefits can be derived from managing a supply network that way, but the downside is if a disruption does occur, it can create significant issues for you,” articulated Wilding.
He suggested a more distributive model can much improve matters, and that it is not a problem to have all your eggs in one basket if you have another basket available! He also discounts the notion that it is always best to have some slack and redundancy in a supply chain. For instance, within a very lean supply chain with a very stable product mix and demand profile, then slack and redundancy can be taken out of the system.
However, sometimes slack is necessary. He stressed, “If you are working in a volatile environment where you have fragility and large fluctuations in demand and a large product mix, a network needs a structure, which does have some slack and redundancy to enable you to cope with those fluctuations.”
Wilding warns companies and retailers not to overemphasise cost implications in their supply chain strategy as service is an important consideration in supply chain management. He also stresses companies not to get stifled by the detail in contract specification, which can remove flexibility and create a detrimental situation in the value-creation process.
“One of the things you find is that very tight contracting can result in poorer performance than having an agreement of the overall aims of what you are trying to achieve and having a looser contract. If you are not careful, contracts can stifle innovation,” Wilding warned.
As a leading academic and business professional specialising in logistics, transport and supply chain management, Wilding has been advocating for many years that competition is no longer between individual companies, but between the supply chains they are part of. He believes it is about companies seeking to partner the best organisations. He used the analogy of a football team – a team must work together in partnership to avoid sub-optimal performances.
“One of the things we’ve also said is the supply chain is about the management of relationships, with all the stakeholders to maximise value in the marketplace and to reduce cost. When managing relationships, you’ve got to have performance measures and processes; it’s like managing inventory. You have got to have everything in place to proactively manage relationships, sadly many organisations don’t do that.”
He mused, “A supply chain should just be working like a synchronised ballet – in the background, all those processes, infrastructure equipment, the information systems, all the people should just be coordinated and serving the customer. If that is done well nobody notices. It’s only when something’s gone wrong that we really notice what’s happening!”