The Nexus of Supply Problems, Part Two: Understanding What’s At Risk

Lower-tier suppliers in your chain can pose unexpected risks, and those risks may lie in unexpected places, as we discussed in our previous blog post.

But let’s also talk about the other end of that equation — the fallout to your business, and your business’ reputation, when those risks are allowed to occur.

First, your brand and reputation can suffer. Imagine if you’re Apple, and there’s a problem with the second tier supplier that provides key components to a cell phone, that are then shipped to another factor that builds the actual phone, then ships it to American consumers. Customers start complaining that their new phones don’t work, and suddenly a very high-profile company has a very high-profile problem that could severely damage their reputation.

And it’s not just physical goods that can suffer hiccups enough to damage a company.

  • Automated inventory systems: These systems can form of the crux of a supply chain, but if the second-tier supplier who makes the software miscalculates, it can lead to major business failures. Some of the biggest supply chain disasters were tabulated by Supply Chain Digest in 2006. While almost a decade old, the lessons still stand — firms from Toys R Us to Nike and Adidas tooks severe hits to their reputation. They needed years to recover in some cases, if they recovered at all.
  • Customer data profiles: Many mid-sized or smaller firms have a third party process online orders, for example. If that third party has a data breach that compromises buyers’ private information, it’s the original company that has to break the bad news — and take the hit to its brand and reputation. This could come from a hacker, from malware, from intentional or unintentional breaches — anywhere there’s a weakness that can be exploited. According to Information Age, “55% of the 2,000 respondents stated that they were ‘not at all likely’ or ‘not very likely’ to do business with an organisation that had suffered a data breach involving credit or debit card.” Not all breaches involve payment information, but that’s an example of the potential impact.
  • Local crisis: Congolese mining firms that violate human rights, or an Asian firm that pollutes the environment, could cause major reputational headaches for Western companies, enough to negatively impact their reputation and brand. “Suddenly, you are an unknowing criminal in the web of globalization,” writes one executive. This may come from not fully vetting lower-tier sections of the supply chain.

And most firms aren’t prepared to deal with these kinds of potential issues throughout their supply chain, according to a 2013 study by MIT and PriceWaterhouseCoopers. They found that 59% of firms surveyed had “immature” supply chain management. Maturity is based on seven categories, quoted below:

  1. Risk governance;
  2. Flexibility and redundancy across the value chain;
  3. Alignment between partners in the supply chain;
  4. Upstream and downstream supply chain integration;
  5. Alignment between internal business functions;
  6. Complexity management/rationalization; and
  7. Data analytics.

Companies that had made those assessments suffered profit dips of less than 3 percent when a problem arose.

A positive case proves the point too. Nissan could have suffered a major blow after a historic earthquake hit Japan in 2012, and shuttered the vast majority of the country’s manufacturing — including those that supplied goods to the international car manufacturer. But Nissan had analyzed their supply chain and braced themselves for disruption to such an extent that they now serve as a textbook case, cited by the MIT study, of the benefits of doing supply chain analysis right, and why it’s worth doing so.

We’ve discussed what’s at stake when key nexus suppliers fail, and how it’s not just things but also data and your firm’s reputation. In a third post, we’ll discuss how to mitigate problems you do find.

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