07/10/2014
By Adrian Chamberlain, CEO, Achilles
Large UK businesses will ‘inevitably’ be damaged by another national supply chain disruption, because they have failed to learn lessons from high-profile incidents like the horse meat scandal and the Bangladesh factory tragedy, new research shows.
Procurement managers from across the UK admitted they have not taken steps to improve their supplier information in the last year, despite a series of high profile disruptions.
In addition, companies said they still do not have full visibility of their suppliers and are not sure their supply chains are ethical – despite a raft of new legislation including a draft Modern Slavery Bill and the US Dodd-Frank Act aimed at eliminating conflict minerals – elements sourced in areas that fund terrorism or wars.
The survey of 146 procurement managers, from organisations with 250+ employees, was carried out by independent research company IFF and commissioned by Achilles – a global supplier information management company.
In total, 93% of businesses said the horse meat scandal – still hitting the headlines - made no difference to the way they manage supplier information. Large buying organisations were around 60% less confident that their suppliers at Tier 2 would continue to deliver in business critical areas, compared to Tier 1s. In addition, 56% of businesses were still reliant to some extent on pieces of paper to manage information about suppliers.
Adrian Chamberlain, Chief Executive of Achilles, said: “The horse meat scandal and Bangladesh factory disaster put the spotlight on buying organisations and resulted in a significant loss of trust among consumers.
“Yet this study shows that large businesses have still not taken steps to protect themselves from potential risks in lower tiers of the supply chain, and it seems inevitable they will be damaged by similar supply chain disruptions in future.
“Businesses spend $60 billion a year managing their supply chains. Yet sadly it seems that industries might have to experience another supply chain crisis before people take seriously the task of modernising their approach to managing supplier information.
“Sadly, it seems that industries might have to experience another supply chain crisis before people take seriously the task of modernising their approach to managing supplier information.”
The Achilles Procurement Trends survey looked at key areas of supplier information management – confidence in suppliers at Tier 2 and below, confidence in managing risk, ethics, the cost of supply chain failure, use of SMEs and impact of the horsemeat scandal.
Confidence in suppliers at Tier 2
Most businesses were 50-60% less confident in their suppliers at Tier 2, compared to Tier 1, across all business critical areas.
More than half (56%) of buyers were ‘very confident’ their Tier 1 suppliers would continue to deliver products on time, but this fell to just 18% by Tier 2. It was the same with financial stability – 36% of buyers were ‘very confident’ their Tier 1 suppliers would remain financially stable, compared to just 15% at Tier 2. The pattern was even replicated with regards to health and safety, where confidence fell from 62% at Tier 1 to 33% at Tier 2.
Adrian Chamberlain added: ““Recent disruptions have shown how suppliers in lower tiers can significantly damage the reputation of global corporations. Yet the survey showed that businesses which use overseas suppliers were even less likely to have information about suppliers at Tier 2 than those who only source in the UK.
“All suppliers should adhere to the same high standards in terms of business critical areas – irrespective of which supply chain ‘tier’ they are found in.
“Large businesses should implement a single questionnaire asking suppliers about business critical functions, to ensure a consistent approach to issues that affect people – be it the workforce, or even consumers.”
Approach/confidence in managing risk
Across all industries, 97% of businesses said they were ‘confident’ in their ability to manage risks.
Yet 56% of all businesses still relied to some extent on pieces of paper to manage information about their suppliers.
“It is concerning that in the event of a fire, 50 per cent of large businesses would lose critical information about their suppliers. That in itself is a huge risk,” Said Adrian Chamberlain.
“Modern supply chains operate globally around the clock, and therefore should be supported by a modern, online management system that keeps supplier information up-to-date 24/7.”
Ethics
The Rana Plaza tragedy on April 24 2013 made consumers realise the true cost of cheap clothing and had an immediate impact on share prices. Shortly afterwards, a team of 91 clothing brands and retailers worked collaboratively to sign an accord on fire and building safety.
Despite ethics being brought to the forefront, in the Achilles survey only half (51%) of manufacturers said they regularly check suppliers’ claims they do not use child workers, slaves or conflict minerals. Only 38% of businesses are auditing their second tier suppliers on the same criteria. Once again, confidence drops significantly through the tiers. While 77% are ‘very confident’ their tier one suppliers don’t use slaves, only 52% felt the same about their Tier 2 suppliers.
“The collapse of the Rana Plaza building was one of the worst industrial accidents in history, killing more than 1,100 people and injuring more than 2,400. We were therefore surprised to see just half of large businesses carrying out audits in terms of ethics,” said Adrian Chamberlain.
“Businesses appear to be overly trusting of their suppliers. Around one in five large manufacturers said they were confident in suppliers’ ethical compliance purely because of personal relationships. But on what basis is this trust founded?”
The use of SMEs
Governments across the world are actively encouraging businesses to engage more with Small to Medium size Enterprises (SMEs). The European Commission is unveiling the biggest raft of change in almost a decade to Utilities and Public Sector Procurement Directives that will provide greater opportunities for SMEs.
Yet 70% of companies surveyed expect to keep static the number of SMEs they work with. Just 12% of large businesses plan to use more SMEs and an equal number plan to use fewer.
Currently, 67% of large businesses use SMEs frequently/often, with 44% of companies awarding up to 25% of their contracts to SMEs in the last 12 months. A fifth of businesses surveyed (20%) awarded up to 50% of their contracts to SMEs in 2013.
Whilst this indicates that a fair number of contracts go to SMEs, there appears to be potential for a far greater use of smaller, possibly more agile businesses.
When asked about the advantages of using SMEs a third of respondents (30%) believed that SMEs were more in touch with customer needs, 27% said they offered better flexibility, 24% cited their efficiency, speed and ability to offer a more reliable service, and 17% believed SMEs presented geographical advantages. One in ten buyers thought they offered the advantage of competitive pricing.
But there were disadvantages levelled against SMEs too. The top ranking challenge cited by 26% of businesses to using an SME was its financial stability – followed by its ability to cope with changes in demand (15%), and adherence to standards and regulations (9%).
How can businesses tap into the advantages offered by SMEs and grow the proportion of contracts awarded to them? Gaining greater confidence on primary concerns like financial stability and adherence to standards and regulations is the key. And that requires accurate and verifiable data on SME suppliers – to give them a chance to shine.
Cost of supply chain failure
Our research reveals some sobering figures. Aggregated results from across all industries show that supply chain failures cost the manufacturing sector £58 million during 2013. That includes the cost of suppliers failing to deliver on time; deliver the required service in terms of quality; financial failure of a supplier; effect of natural disasters and severe weather; damage to reputation due to a supplier and failure of a supplier to meet Health & Safety obligations.
Some 5% of respondents had been exposed to litigation and 10% of those surveyed experienced damage to reputation, with an average cost of £292,000 to those incurring cost.
Of course, not all supply chain failures can be avoided, but efforts need to be made to identify risk and early indicators of failure so that their impact can be mitigated. Businesses must be proactive and use the technology available. Our survey found that half of businesses (51%) use a combination of paper and online databases to manage their supply chain, and our 2013 report found that nearly half of all companies (47%) use multiple databases.
Companies should centralise supplier information and introduce processes that create consistency of data across the entire enterprise.
Looking ahead
Poor supplier information management can erode shareholder value, destroy consumer confidence and result in significant costs.
Yet businesses are still liable to experiencing further serious supply chain disruptions because they are not being proactive in managing information about suppliers. Buying organisations should take three steps to protect themselves:
1) Outsource supplier information management
Gathering and managing supplier information takes a lot of time, effort and specialist expertise.
However, according to the survey, 80% of businesses still manage their supply chains internally, with 47% of companies using multiple supplier databases. This introduces risk, as the more databases there are the greater the likelihood of inconsistent and errant information.
Outsourcing the management of supplier information to a specialist, independent organisation that uses a global cloud based platform to manage collaborative communities, opens up a world of
opportunities for improving data accuracy, streamlining processes, mapping supplier relationships at all tiers and reducing exposure to supply chain risk.
2) Work in a collaborative community
Efforts to improve information about the supply chain work best when whole industries – such as oil and gas – work collaboratively to agree and implement standardised requirements of all suppliers in terms of business critical areas, such as health and safety to reduce the burden of administration. They can then manage the information on a global, centralised database – implementing the same high standards not only in the UK but in every country in which they operate.
There are many advantages for suppliers too in working within industry focused collaborative communities. Filling in a single PQQ requires far less work and fewer resources than working through
multiple forms for each prospective customer. And exposure to a wider audience of potential buyers through the Achilles platform presents both local and possibly global opportunities – opening a
shop window to the world.
Using supply chain information in an intelligent, collaborative way protects the business and preserves shareholder value.
3) Get to grips with supply chain mapping
The best way of gaining visibility of every supplier, and of gathering the necessary information on those suppliers, is to map out the entire supply chain. And there is a lot of work to be done here, as across every industry only 50% of companies have mapped out their supply chains to date.
Supply chain mapping works best when cascading invitations are sent from buyer to supplier and from suppliers’ suppliers ad infinitum, gathering comprehensive information about the supply chain and supplier compliance within it. Most industries share common suppliers, so what may be difficult to do for an individual organisation becomes easier to achieve collectively.
Adrian Chamberlain added: “The problem for most companies trying to map their supply chain is that, other than the very largest multi-nationals, businesses have diluted leverage when they get below their tier one suppliers. So you have to collaborate. If three or four large buyers start asking their suppliers to map out their supply chain they have little choice but to comply – and that works right down the chain.”
