SUPPLY CHAIN RISK MANAGEMENT

Don McLeod B.Tech (Hons), CIRM

Previously Logistics Manager, The Laminex Group, New Zealand

Background

The scope of supply chain risk is wide covering procurement, inbound logistics, operations planning, manufacturing, transport and outbound logistics, as well as support functions. The core industry considered here is wood panel manufacturing and distribution, and the area of supply chain outbound logistics.

The Laminex Group manufactures and distributes a wide range of products including MDF, particleboard, Laminex and Melteca low pressure, and Formica high pressure laminate, hardboard, insulation board, as well as doors and MDF mouldings. The largest product group, wood panel products, are characterised by being large, bulky, minimally packaged, and easily damaged physically or by water. Wood panels are also difficult to load in to containers. The Laminex Group exports approximately half of its product to overseas markets.

The Dilemma of Supply Chain Risk

Supply chains are generally set up with the intention of meeting stakeholder needs and customer service promises at least cost and acceptable risk. The clarity of expectations on each of these varies widely between businesses. What is acceptable supply chain risk and even what these risks are, how they inter-relate, or who is responsible for managing them is often less well defined.

Risks apply within all parts of the supply chain. The size of the risk depends on the potential loss value assigned or perceived. In logistics, possibly the closer to the end customer the more visible and high profile is the risk. International logistics can bring in added network complexities and supply chain risk considerations. Assessing and managing international outbound logistics supply chain risk is the focus of this paper.

Defining Supply Chain Risk

'The likelihood of the supply chain being broken and/or losses occurring within it'

There are two major business risk categories, insurable risk and commercial risk.

The non-exhaustive summary of these risks are shown in the following table.

In supply chain terms the majority of these risks can be considered manageable.

For example one common supply chain risk which is regularly discussed at various levels within a business is demand risk. The common questions arising are how well can demand be managed, who is responsible, or is demand volatility an inevitable major risk? Furthermore, how much of a company's supply performance is related to demand risk, as opposed to operational capability? Indeed a company's functions and business processes ideally work together for the best results in terms of performance and risk.

Types of supply chain risks prevalent in outbound logistics of wood panel products are:

Physical damage - physical product damage

Water damage - introduction of water or moisture resulting in a physical distortion or an adverse change to the physical properties or appearance of the product

Physical loss - product lost or missing in transit or storage

Demand - constraints to respond to changing demand patterns and volumes

Supply - variation in supply and effect of batch size and lead-time

Supplier capability and reliability

Process capability and reliability

Supply chain capability and reliability - the capability and reliability of the supply chain network, comprised of inter-related systems and processes

Communication and information systems design and functionality

Biosecurity - contamination of products or intervention from governing authorities

Border security - introduction of unknown goods or weapons at any stage of the supply chain or intervention from governing authorities. Recently this is being implemented to export supply chains by exporters under 'Secure Export Partnerships' with NZ customs. The main driver is international container security originating from the USA , and currently being legislated in NZ under the Border Security Bill.

Insured Versus Managed Risk

The need and benefit for managing risk often depends on company policy, exposure to risk, and perceived value. With strong customer intimacy, recognition and support of customers' supply chain risks are also likely to be important. There is a trade-off between the cost of insurance, and the risk of the loss. Where a company insures for major commercial risks only, this implies that risk minimisation will be by effectively managing it.

With legislated insurance such as with Limited Carriers' Liability in New Zealand , then management of such risks can further minimise the remaining exposure to losses and costs, including internal and external administration costs. It is important for a company to recognise the true direct and indirect costs associated with these risks. It is interesting to ask whether if a transport company did not pay for Limited Carriers' Liability and had to pay out for the losses, whether they would be more effective in working with their customers to minimise delivery damage and eliminate the causes.

Where insurance is covered such as with export CIF terms (Carriage, Insurance, and Freight), the insurance company will likely need details of the products and services and possibly the supply chain, as well as a loss history to assess the risk and cost of insurance. CIF insurance costs are typically in the region of 0.25 to 1.00% of the product value, depending on the assessment of these characteristics. This assessment process is worthy in either case, as any gaps in information or processes can be recognised and rectified. The balance between insured and managed risk opportunities can also gain clarification.

Where value is expected from managing supply chain risks, these can be either resourced internally, or contracted out. Contracting out could be with the company's insurance company, or where used, freight forwarder. Whichever approach is taken, it is important that the leadership for supply chain management is maintained close to the business' growth and strategic development, and has a clear understanding of both internal and external business processes, supply chains, and stakeholders. Effective network management is essential. In the case of a freight forwarder, a good test is how well they can build in to networks outside of their own.

Managing Supply Chain Risk

The assessment and management of commercial risks often fall with the finance or commercial functions of a business. The assessment of supply chain risk is possibly less understood and could fall under a number of functions related to or within the supply chain business function. This could be within procurement, planning, logistics, or sales and marketing, or where in place, the supply chain function itself.

In assessing supply chain risks, the need for managing risks may come from a major and visible, or ongoing cause of unrecoverable losses or impact on customers. In supply chain terms, a customer could be the next operation of the supply chain.

Alternatively, a more systematic approach can be used to assess, prioritise, and manage supply chain risks. It could be considered that sales and operations planning is one of these tools, in risk terms primarily managing supply and demand risk.

Mapping or flowcharting supply chains and risks within these is an effective assessment technique. The benefits of closely involving supply chain members including external suppliers in assessing, reviewing and developing risk plans cannot be overdone. In larger organisations, the importance of understanding business processes is seen to be taken as far as temporary staff implants in to key outside businesses.

In developing supply chain risk plans, consideration needs to be given to each step, and the inter-relationships between steps and the corresponding business processes. These relationships can benefit from being formalised in to service level or operational agreements, and governance plans. Particular care should be given to the handover points, transaction traceability, and key performance indicators.

Leadership is important to drive the entire process, and to ensure there is follow-up to complete implementation, and continuous improvement. Although a project leader is important, when this is supported by leadership qualities within the whole supply chain team the results can be even more effective and rewarding.

Supply Chain Risk Management Case Study

Some supply chain risks are peculiar and high risk to a particular type of industry.

One such risk which impacts on wood products supply chains to Australia each year is the Arhopalus or Longhorn Beetle. With the short shipping transit times, untreated beetles are potentially still alive if they reach Australia .

This beetle is particular to New Zealand , found around forest areas, and in the season of November through to April each year, is active and flying. Attracted by light and warm moist areas of wood, it is a potential hitch hiker with wood products.

Fumigation practices had been in place each season for some time; however the earlier treatment method and approach was only seen to be partially effective, particularly when the entire supply chain was considered. Further tightening of biosecurity standards in Australia saw increasing intervention and cost, with the 2002/3 season very costly to wood product exporters. Full fumigation of several breakbulk vessels was required prior to discharge of cargo into the Australian ports.

Prior to the 2003/4 season, a new approach was set up, covering the entire supply chain.

The involved parties set up a working group, including MAF (Ministry of Agriculture and Fisheries), the certification body Agri-Quality, exporters, the shipping lines, and the fumigators. The recommendations and supply chain approach was taken by MAF/Agri-Quality to involved timber product exporters throughout the country. Each member's supply chain risk management process was required to be secure, and each export supported by an approved fumigation certificate before being accepted for shipment. Australian biosecurity authorities from AQIS (Australian Quarantine and Inspection Service) also reviewed the risk practices that were in place and viewed these favourably.

There was no beetle contamination or refumigation costs of breakbulk shipments during the 2003/4 beetle season.

With increasing border security requirements throughout the world, there is a growing need for supply chain risk management. This type of risk management looks further than simply at the border, with consideration for each step of the supply chain and how the steps may inter-relate.

The following risk plan outlines each step of the Arhopalus supply chain now used by The Laminex Group for wood panel products to Australia . The plan was developed with consultation and direct involvement of the supply chain members including regulatory authorities. One of the key success factors was seen to be including the regulatory authorities as part of the supply chain risk management team.

ARHOPALUS RISK PLAN- MDF EXPORT SUPPLY CHAIN

Supply Chain Risk Re-Engineering Case Study

The bulk and dimensions of wood panel products make container loading at best difficult. This is particularly the case for long length panels such as those over 2.5m.

Physical and water damage levels during loading, unloading, shipping and delivery were small but significant using the more typical breakbulk or flatrack shipment methods. More major shipping losses also occur occasionally. Damage reduction through managed continuous improvement was in place, however a more robust and cost effective solution was sought.

Consideration for containerisation had been given on a number of previous occasions, and some specific applications seen in other industry sectors. The presentation of the innovative Tynecat loading and unloading equipment and methods, and analysis of the supply chain and customer delivery needs, indicated that this new supply chain had a likely business case for longer wood panel products.

Trials were conducted and the business case was seen to be even stronger when including additional benefits in related supply chain risks such as health and safety, environmental, and biosecurity.

Wood panel Product Supply Chain Assessment

Flatrack         Tynecat

Customs clear and deliver to customer on flatrack or de-van in to store

 

Total Supply Cost 1.00   Total Supply Costs 0.80

Loading 3.66m length wood panel products in to a container using the Tynecat

Summary

Recognising that supply chain risk exists, consideration first needs to be given as to how these risks apply, their size and relative importance to the business, and then whether they are to be managed or insured. In either case, it is beneficial that both the risks and the supply chains involved be well understood.

It is seen as of key importance that the supply chain function is well defined in a business. If this is not the case, then it is likely that supply chain risks will be transferred between functional areas within a business, or between the business and external parties. Costs incurred will be either direct, or indirect. Risk and cost minimisation can be expected to result from effective risk management, and accountabilities for these risks.

The steps for managing supply chain risks are as follows:

•  Determine supply chain risks to be managed according to company policy or functional business strategies. Insured risks are also likely to benefit from being managed.

•  Prioritise supply chain risks.

•  Understand all the businesses processes in each supply chain and establish process flowcharts for each.

•  Involve supply chain members including external parties and review processes and the associated risks.

•  Jointly develop and agree each supply chain risk plan, process enhancements if required, and key performance indicators.

•  Implement the supply chain risk management plan, using service level and operational agreements between parties, and monitor performance against KPI's. Particular attention to the handover points.

•  Corrective action and continuous improvement.

•  Accountability and leadership by supply chain members are important aspects at each stage.

This is one approach that has been used successfully in managing some specific supply chain risks. This approach is considered suitable for a range of supply chain risks, where the benefit and need is recognised across supply chain members and stakeholders.

Acknowledgements

The author wishes to thank the following people;

Allen Fraser , Agri-Quality National Business Manager for Forestry, for support and leadership in developing the timber industry wide Arhopalus Beetle risk management plan

David Hope, Senior Lecturer at The New Zealand Maritime School, for support on the Supply Chain approach of risk management, and providing the Recognition and Classification of Risk flowchart.

Ray Smith, former National Business Development Manager, Paccon Logistics New Zealand, for introduction and information on the Tynecat container loading system.

Paul Judson , former Supply Chain Manager of The Laminex Group New Zealand, for the constant reminder that supply chain risk does exist, and for highlighting the importance of the supply chain function in a business