Oil schmoil: Uncertainty and change comprise today’s biggest supply chain concerns
Frank O Smith, senior contributing editor (fosmith@thewritinggroup.com) -- Manufacturing Business Technology, 12/23/2008 11:09:00 AM
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Step aside, energy. A survey out of Boston-based AMR Research on supply chain risk—released early December—now puts constant change at the top of the factors list.
“When we did the survey in May, rising costs of transportation, energy, and commodities were viewed as the biggest risks,” says Noha Tohamy, VP of research and author of the report. “Now with oil below $50 a barrel—though it’s better on costs—the bigger issue is [uncertainty about] what’s coming around the corner. It’s not safe to make assumptions. It’s critical to have fluid, flexible strategies that can help you deal with whatever comes your way.”
Compounding the difficulty of devising strategies for sourcing and manufacturing, the survey of 130 global companies confirms that China is now viewed as contributing the most risk to supply chains. China ranked No. 1 in nine of 15 critical areas of concern, including intellectual property (IP) infringement; product quality failure; and security breaches (see chart).
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| An AMR Research study of 130 global companies, released December 2008, indicates China is now viewed as contributing the most risk to supply chains. Despite the risk ranking, China still holds significant cost advantage when it comes to labor and material. |
“Strategy with regard to China is not straightforward,” Tohamy points out. “Though it is the biggest culprit in terms of IP infringement and product recalls, it still holds significant cost advantage [when considering] labor and material. Companies aren’t going to just up and leave. But people are rethinking putting all their eggs in one basket in China.”
The pursuit of nearshoring as an alternative—formally driven in large part by high transportation costs—also is much more complex now due to plummeting fuel costs. Yet the survey reveals companies will be expanding nearshoring potential by a factor of 5 to 1—up from 4 to 1 recorded in May. Expansion in China is expected to continue at a factor of 2 to 1—down from 4 to 1 in May.
Even with nearshoring, however, companies can no longer realistically settle on one strategy for the long term.
“You can’t say that for the next five to 10 years you’ll be sourcing and manufacturing in Mexico,” says Tohamy. “It complicates making fixed-asset investments, or tying yourself to long-term supplier contracts. We’ve learned there’s no way of knowing what’s around the corner. And we don’t know that China will maintain its structure of cost benefits.”
Collaborating with partners to help them mitigate risk should be a key component of anyone’s supply chain strategy, Tohamy asserts, citing supply chain disruption due to natural disasters—in particular the impact of an earthquake last summer in China. “It’s win-win for everyone to assist them in that,” she says.
| “It’s not safe to make assumptions. It’s critical to have fluid, flexible strategies that can help you deal with whatever comes your way.” —Noha Tohamy, VP, AMR Research |
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Multi-channel sourcing and greater supply chain visibility also are deemed key risk mitigation strategies. As found in the AMR report, “Investment in IT to build supply chain visibility within the organization and across trading partners” represents a key risk-mitigation strategy. Especially acute, say the survey respondents, is making sense of the increasing volume of available data.
"Tools and processes are needed for mining this data and converting it into actionable insights,” maintains Tohamy. “Recent events have demonstrated that businesses can no longer assume static, relative ranking of cost contributions in the supply chain. The only successful approach to managing supply chains is to assume constant change and embed the ability to shift focus, reshape supply chain strategies, and rebalance resources on a more frequent basis.
