An often overlooked place in which businesses can get ahead of their rivals is supply chain risk. Those that recover from disasters quicker can often take advantage over a stricken competitor and claim market share. Whereas those that flounder can only watch their companies push forward as they struggle to manage the crisis.
Latest research in Procurement Leaders shows that companies are often overlooking the potential for competitive advantage in risk management. Traditional approaches to mitigation relate to supplier insolvency or non-delivery. Where such events occur, buyers look to their contracts to penalise the vendor for any non-compliance issues. Most of the time, goods arrived as ordered and suppliers were reliable partners.
However, the globalized economy is exposing companies to a more diverse array of shocks ranging from political risks, to natural disasters and to new forms of reputational risks. In our research we find that on average, a Fortune 500 company will expect to face 7.6 disruptions in the supply network, costing $10 million a year. Beyond the immediate financial cost of production closures and failed delivery, most do not have any oversight as to the competitive impact of these events.
Yet, when they are unchecked, supply disruptions can have devastating consequences on the bottom line.
We saw yesterday that Toyota was suffering from a competitive disadvantage in disaster response efforts in Japan.
Earlier this month, an earthquake shook in the southern Japanese city of Kumamoto, which suffered great destruction. 48 people died and many companies were forced to close operations.
Major car automotive manufacturers such as Honda and Nissan also felt the shock and closed down plants within the affected region. The difference between these two companies and Toyota was their relative speed of recovery.
Toyota suspended its plants nationwide after the quake and has restored only five of the 26 closed facilities. In contrast Honda and Nissan quickly resumed production elsewhere in the country. The main difference being that these two companies were not so reliant on their local supply chain to enable production as was Toyota.
Toyota’s losses are figured to currently stand at $277 million following the event. There will also be a non-tangible strategic impact. Its position within the marketplace will also suffer as Honda and Nissan can potentially fill orders that Toyota cannot.
This only goes to show that strong risk management within the supply chain can change the market.
Another famous example of similar market-altering event relates to a fire in an electronic component company in 2000. This supplier then sold goods to mobile telephone manufacturers Ericsson and Nokia. The fire, although small, activated the sprinkler systems, destroying an entire batch of components. This in turn created a global shortage in a key material.
Ericsson’s procurement team accepted the initial reports of a small fire creating limited damage. Whereas Nokia’s buyers were more proactive, they rapidly bought up spare capacity elsewhere and re-engineered their products to fit alternative supplier parts. Once the scale of the damage was discovered, Ericsson missed orders, ceded market share, lost $400m in missed sales and eventually exited the mobile telephone manufacturing business.
Being slow can cost the business more than you think. For Ericsson, it wasn’t just about water-damaged components, the disruption eventually forced it from the market.
To reduce these effects, businesses need to understand their suppliers. Where do they have vulnerabilities and, perhaps more importantly, to who do these companies also supply.
This question leads to the somewhat paradoxical conclusion: Where suppliers also provide goods to a competitor firm, the level of risk management protection can potentially be lightened. If the supplier fails, then both rivals are affected and the competitive impact is reduced.
However, the rival that can best marshal resources to minimize the damage felt will be able to enjoy competitive advantage in a once perilous situation. Here we can see risk turn into opportunity.
On the other hand, where a supplier sells to a single company, then the pain of this supply chain disruption will be felt by only one. Its rival will reap the benefits, without any additional action.
The lesson from these deliberations underlines the importance of conducting thorough risk management in the supply chain. Understand where there are vulnerabilities, know supplier businesses and put into place mitigation plans that ensure fast recovery. Once in place, businesses can await any disruptions knowing that they will emerge in front.
This article was written by Jonathan Webb from Forbes and was legally licensed through the NewsCred publisher network.