On Tuesday, March 29th, attendees at CPO Rising 2016: the Agility Agenda, got to hear former CPO, procurement “luminary”, and CPO Rising “Hall of Fame” inductee, Harold “Hal” Good deliver a breakout presentation on the CPO Threat Matrix: Preparing for and Managing Through Global Supply Risk. As a public-sector procurement pro with nearly 30 years of experience, including the Director of Procurement and Contracting for the City of Palm Springs, California, Hal’s presentation on supply risk management had a distinct public safety flare to it. Throughout his 30-minute presentation, he explored the risks associated with natural disasters, particularly earthquakes, with an emphasis on preparing for and ensuring early warning and continuity of operations.
Fukushima Hamadori: Lessons Learned the Hard Way
Hal kicked off his presentation with a brief case study on how global weather events and natural disasters can have significant and far-reaching repercussions for the global supply chains of large and small brands. The April 2011 Fukushima Hamadori earthquake is a prime example; it triggered a tsunami, caused deaths and power outages at the Fukushima Daiichi nuclear power plant, and resulted in the meltdown of three nuclear reactors and ultimately the release of radioactive material into the adjacent land and ocean. The event also caused a catastrophic disruption in the supply chain and production for Toyota, the world’s largest automobile company. The impact was both wide and deep.
Of the 1,500 locations where Toyota parts were produced, roughly 300 of them (20%) were in “at risk” locations that were the sole source for almost 1,000 parts. As a result, production, assembly, distribution, and sales of Toyota vehicles were severely impacted, and the company lost precious market share. It took its supply chain more than six months to recover, and it forced company executives to take a long, hard look in the mirror. Prior to the earthquake, their “grip” on Toyota’s supply chain had been an “illusion.” After the earthquake, executives made global supply chain risk management a top priority. As Hal described, they “pursued contingency measures applicable to all of its supply sources,” and have continued to extend this resiliency into their third and fourth-tier suppliers.
The 2011 Japanese earthquake and tsunami impacted other industries in Japan, the Pacific Rim, the U.S., and other countries around the world, and together they serve as a prime example of how fragile global supply chains are and what companies must do in order to become more resilient vis-à-vis risk. Against this backdrop, Hal cited the World Economic Forum’s Global Risks Report – 2016, which found that “just 25% of a typical company’s end-to-end supply chain is being assessed in any way for risk.” Moreover, this research “rarely found robust risk practices among firms that pursue a global outsourcing strategy.” Taken together, these findings suggest that global brands are woefully underprepared for major risk events, like earthquakes, tsunamis, ecological disasters, and other threats to their supply chains.
Supply Risks: Causes and Effects
Hal went on to further describe the state of supply risk in 2016, particularly the top causes and effects of supply chain disruption. Among causes:
- Unplanned IT and telecommunications outages account for 64%
- Cyber attacks and data breaches account for 54%
- Adverse weather accounts for 50%
- New laws and regulations, because they are ongoing, are harder to quantify, but grow yearly
Top effects of supply chain disruption include:
- Loss of productivity: 55%
- Customer complaints: 40%
- Increased cost of doing business: 39%
- Loss of revenues: 38%
- Impaired service outcomes: 36%
Unfortunately, 14% of those responding estimated that they had incurred more than $1 million in cumulative losses, while 9% had lost more than $1 million in a single incident. Clearly, the risks and stakes are too high for enterprise procurement teams to not take action.
How to Get Ahead of the Inevitable
For Hal, who has had experience managing the risks associated with earthquakes and weather-related events, modern technological solutions can provide enterprises, CPOs, and risk teams with the tools they need to get ahead of the risks; or at least provide some early warning. For example, a year before the Fukushima earthquake in Japan, a volcano erupted in Iceland, causing a swath of flight cancelations and delays to and from Europe. At IBM, their internal business intelligence (“BI”) software crunched commodity and flight data and determined that when flights would resume, Hong Kong would be the crinkle in their supply chain, as European buyers and Asian suppliers would rush to fill backorders at roughly the same time. The BI tool advised IBM staffers to book commercial and charter flights well before the dust settled, beating the rush and getting their operations back online sooner.
As Hal said, “in response to a natural disaster or man-made crisis anywhere in the world, it is possible to constantly play out scenarios through business analytics to find a way of to quickly recover from or avoid adverse situations.”
Weather, another natural element that CPOs and procurement teams need to account for, “may be the single largest external swing factor in business performance,” said Hal. With an estimated economic impact of nearly half a trillion dollars in the U.S. alone, BI systems assume no changes in the weather from day to day or impact from adverse weather conditions. But the weather can significantly impact business operations and ought to be accounted for. Fortunately, CPOs and procurement teams can take advantage of the burgeoning “Internet of Things” phenomenon and marry weather-related data to robust BI analytics solutions in order to derive more actionable intelligence and become agile in the face of changing weather patterns.
Similarly, earthquake early warning systems can automatically shut down critical infrastructure minutes and even seconds before an earthquake hits. Earthquakes send energy outward from the seismic event, and take several seconds to several minutes to be felt. Sensors can detect this activity and provide early warning; several California schools currently employ this technology, and it can be adapted to reduce damage to critical infrastructure, which can reduce longer-term supply disruptions.
A familiar theme heard here on CPO Rising and in Ardent Partners’ research is that supplier and supply chain risk are important to CPOs and procurement teams, yet they remain overlooked and under-appreciated parts of the sourcing process. Man-made events, like war and terrorism, and natural disasters, like earthquakes, tsunamis, and volcanic eruptions, can seriously disrupt global supply chains and set companies back months and millions of dollars. Yet few enterprises and CPOs have taken the necessary steps to protect themselves against the unknown risks that lurk just below the surface in today’s global supply waters. Fortunately, modern technologies, like BI and analytics, early-warning systems, and third-party logistics providers, which bridge the gap between buyers operating in a competitive global sourcing environment, can help CPOs, procurement teams, and risk managers get ahead of some of the risks at play today.