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: Supply Chain Risk & Sustainability

Managing supply chains in today's competitive world is increasingly challenging. The uncertainties of supply and demand, globalisation of the market, shorter and shorter product and technology life cycles, and the increased out-sourcing of manufacturing, distribution and logistics is resulting in complex supply network relationships, leading to higher exposure to risks in the supply chain.

These supply chain risks come in many different forms. First, the financial risks can be huge. Inventory costs due to obsolescence, markdowns and stock-outs, can be significant. Personal computers devalue by more than one percent per week. Recent statistics showed that retail markdowns constitute about 20% of total retail sales in the US. Mismanaged supply chains, leading to excessive or mismatched inventory, are thus liable to huge financial risks. In 2001 Cisco announced a US$2 billion write-off of obsolete inventory as a result of a collapse in demand for their products.

The complexity and uncertainty forces within a supply chain can also drive the 'chaos' risks of a supply chain. These chaos effects result from over-reactions, unnecessary interventions, second guessing, mistrust, and distorted information throughout a supply chain. The well-known bullwhip effect, which describes increasing fluctuations of order patterns from downstream to upstream supply chains, is an example of such chaos.

The existence of chaos in a supply chain also means that it is impossible to make the right decisions for every player in a supply chain. The risks of making the wrong or ineffective decisions, or decision risks, become the inevitable consequence. Thus, for example, it will not be possible to design optimal production schedules if there is uncertainty as to when materials or components will be available.

Ultimately, the supply chain is exposed to external risks, ie disruptions caused by industrial action, acts of God, war and so on.

Because exposure to these risks in the supply chain increases the vulnerability of the organisation, it is important that the key risks be identified and managed. This is the rationale behind the work of the Supply Chain Sustainability Risk Forum. If you would like more information on the work of the Group, then visit the CLSCM web-site or contact Dr Omera Khan, the co-ordinator for the research team.

An issue that has recently gained prominence is the issue of supply chain sustainability.  Companies are being forced to look at their carbon footprints.  Nowhere is this more necessary than in the area of supply chain management as the realisation grows that decisions about product sourcing and distribution can have a major effect on emissions.  In particular, the impact of transport on carbon emissions is a growing concern as some estimates suggest that up to 25 per cent of the total is from this source.

Reducing the carbon footprint is not just ecologically sound but increasingly makes economic sense.

The first reason for this is that the cost of energy will continue to rise.  Carbon taxes and carbon caps are now a reality.  You don't need to be a futurologist to see a time when transport fuel will bear a much heavier tax burden than today or that carbon caps will be more stringently applied leading to a growth in carbon trading.

Arnold Schwarzenegger, the governor of California, recently announced fuel standards for the state that will lead to significant extra costs for companies with carbon-intensive supply chains.  Such initiatives will be mirrored elsewhere.

Another reason for looking at supply chains from a carbon perspective is that it may be dangerous to commit to strategies that are not sustainable.  Much publicity has been given to the issue of food miles.

At Cranfield, we are conducting research into the true costs of global sourcing.  This programme aims to look at total supply chain costs as well as the wider environmental impact of offshore sourcing. 

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