Risk Protection and the Supply Chain

Words by Marc Barnes, originally published by Food Australia

Assessing risk and securing your supply chain does more than just protect product and relationships. It is the backbone of successful business.

A globalized world is not a new concept or phenomenon. In fact international free trade agreements, the rapid progress and growing wealth of developing nations, and the development of revolutionary technologies such as the internet are all major influences on a continually globalized world and marketplace.

For companies to survive and thrive, particularly in the food industry, careful management of potential risks to the supply chain is integral. And yet it is an area in which many companies do not invest enough or accurately consider the sometimes business-ending consequences if and when there is disruption to the supply chain.

In a 2013 whitepaper by the American Productivity and Quality Center (APQC), 77 per cent of organizations indicated they had experienced at least one unexpected supply chain disruption over the previous two years, and yet only 65 per cent of respondents agreed that there was a need to identify and eliminate obstacles that undermine the ability to better manage supply chain risks.

Worryingly still, 47 per cent reported a lack of the resources required to assess risks properly and 64 per cent confessed to having poor visibility into risk factors among their tier 2 and tier 3 suppliers. In fact, the total number of organizations that experienced at least one supply chain disruption during the previous year said nearly half of these disruptions originated below the immediate tier 1 supplier.

But how does a company effectively monitor, manage and improve its supply chain?

A good supplier-auditing program is at the core of driving business improvements because it manages suppliers, which in return, manages risk. The first step for any company is mapping out the direct and indirect suppliers in the supply chain, which in a globalized supply chain can be particularly difficult and complex to navigate as suppliers are often geographically far from management hubs.

Top supply chain concerns to come from the APQC survey include high impact natural disasters such as floods, earthquakes and tsunamis (particularly disruptive for food and agribusiness industries); extreme weather such as severe heat waves or snowstorms; political turmoil in supplier nations; unplanned IT and telecommunications outages, data breaches and cyber attacks.

The larger and more diverse a company’s supply chain, the more susceptible it is to these risk-averse events. Yet the size of the company does not necessarily dictate the extent and full scope of its potential loss, should it not sufficiently account for risk.

BSI’s 2013 SCREEN Global Intelligence Report shows that risk to all companies’ livelihoods and success is everywhere. The report found that political and labor unrest caused economic losses of at least $100 billion in Asia alone; there was a $22.4 billion loss worldwide due to cargo theft and there were terrorist attacks on the supply chain in 15 different countries in 2013 including Colombia, Egypt, India and Thailand. Geopolitical events such as these must be considered when expanding a supply chain beyond Australian borders. Events such as the horse meat scandal in the United Kingdom emphasise the potential risk in the Australian food industry - and the need for clarity in the food supply chain. As issues such as Food Terrorism become more of a reality, businesses need to be extra vigilant and confident that they have set up the basic practices on keeping their supply chains sabotage-free.

How to identify risk

The key to identifying and managing risk in the supply chain is intelligence, compliance tools and supplier verification audits. It is not uncommon that organizations have difficulty identifying all of their suppliers yet it is business intelligence to institute controls and leverage supply chain intelligence to not only ensure continued smooth production but also protect overall brand. Using a good supplier audit program will help identify the highest risk suppliers to focus on upfront.

There are several ways in which to conduct a supplier audit including supplier self-assessment, an onsite audit and supply chain verification audits. A supplier self-assessment is an informal preliminary audit that involves each supplier completing a self-assessment that will help identify areas of weakness in the supply chain, and areas to focus on during the more extensive on-site audit process.

An on-site audit involves assessing everything from supplier performance and environmental conditions to controls in place around process and product quality and complaint handling. More specifically, manufacturers generally look for assurances from their supplier base that that they are adhering to the requirements they have set forward. These include:

- Quality agreements – providing quality assurance that products are produced and controlled consistently, and in the case of pharmaceutical and food, with no risk of cross contamination

- Environmental compliance – identify and manage the environmental impact of an organization’s products, and ensure environmental performance

- Corporate social responsibility and human rights – ensuring socially responsible, fair treatment of employees pertaining to health and safety, wages and underage workers

- Bribery and corruption – is your supply chain actually legal in the jurisdictions it trades in

- Import compliance and trade security – risk of un-manifested cargo, counterfeiting and theft

- Business continuity – assurances that in the event of business disruption, a supplier has a plan in place to quickly and effectively resume business operations; and

- Behavioural compliance – do your suppliers share you own company values

In today’s world, companies are under increasing pressure to establish effective programs around labor and environmental practices, responsible and ethical sourcing of materials, and efficiencies around energy, water and planning for a business disruption. A supply chain verification audit provides a bird’s eye view of many aspects of a supply chain and allows manufacturers to determine the criticality of suppliers or strategic impact on the supply chain by determining who are the high risk and low risk suppliers; understanding the reasons why, and assessing the controls in place for suppliers.

Visibility

Having a secure supply chain provides a company with the visibility it needs to react and address any issue that may arise. It is reasonable therefore that the harm that potential disruptions pose to daily operations must be equalled by the allocation of sufficient resources to assess threats, take preventative measures and mitigate the resulting damage. Failure to work with suppliers to mitigate threats, prepare and verify an effective response can lead to huge financial losses and in some cases, irreparable damage to an organization.

Can your company confidently answer these seven supply chain questions?

1. How many suppliers do you have?
2. How many are direct vs. indirect?
3. Do you actively verify the living profiles of your suppliers?
4. Have you conducted risk assessments of all your suppliers?
5. How many have you physically visited?
6. Does your supply chain adhere to your corporate values?
7. Can you tell your supply chain story?

Marc Barnes is BSI’s Global Director of Food and Managing Director of BSI Group Australia. BSI are a Royal Charter company with over 2,800 Food and Agriculture standards in their portfolio, supporting the food industry and supply chain on issues including food safety, food scarcity, sustainability, land usage, energy, water and Corporate Social Responsibility. BSI pioneered the development of PAS 96, working with organizations like McDonald's Europe and Tesco to create a standard that safeguards food and drink against malicious tampering by identifying and managing risks in supply chains. In Australia, BSI offers a range of integrated services including training, certification and verification, and business improvement tools, working with organizations across the entire supply chain to keep food safe, sustainable and socially responsible. For further information please visit bsigroup.com/en-au.