Risks of a Global Supply Chain
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Risks of a Global Supply Chain

The advent of globalisation has brought many issues to the fore. In economic terms, globalisation refers primarily to the ways in which “economic and industrial institutions interact in various locations throughout the world, with primacy given to no specific geographic location.”

For businesses, border restrictions are no longer a hindrance as they can sell products and provide services anywhere in the world. Globalisation also allows for purchases across nations where materials are required from one country to another.

The ease with which this has been able to take place is due to the development of information and communication technologies (ICTs). In what is known as ‘informational’, the process by which “information technologies, such as the Internet, world-wide web (WWW), and other communication technologies have transformed economic and social relations to such an extent that economic (and socio-cultural) barriers are minimised.”

Coupled with the growth of ICTs is the development of more efficient and speedier transportation systems as well as reduced costs of travel and transportation. Thus, it is, in essence these factors as a whole that have led businesses to adopt global supply chains.

However, for local and global supply chains there are both advantages and disadvantages.

Local Supply Chains

Local supply chains benefit from knowing the realities of the country they operate in and so are better able to negotiate the dynamics of the politics, economics, and markets and mitigate risks. By knowing the language and the language of the business they have access to local experts and face fewer communication problems. This is underlined by intercultural communication within businesses as there is already a strong relationship in place due to the sharing of a common language.

Economically, local supply chains do not have to face trade barriers as impediments as well as changes within business laws in another country. Also, transfer prices are all in the same local currency and there are no differences in taxes or duties. Given the use of a single currency there is no scope of facing the challenges of fluctuating exchange rates and related transfer prices.

However, the disadvantages are that they may not always be able to provide the cheapest resources or materials and face barriers of distance and geography. Thus, by having access to a global pool makes it easier to source better, affordable, or quality products and services from a larger market.

 

Global Supply Chains

Likewise, global supply chains face specific advantages and disadvantages as well as some critical risks.

First, they can source raw materials and components from wherever is cheapest or most conducive globally, and thus, become more competitive in the worldwide market place. In this regard, it is evident that the manufacturing sector was a first mover in taking advantage of this phenomenon.

However, global supply chains are vulnerable to disruptions and risks. Disruptions can have significant impact on the performance, profitability and fortunes of a business.

For example, in 2000, the large network and telecommunications company, Ericsson, lost more than 400 million euros when a fire broke out at a factory where Philips produced semi-conductors that were also used for Ericsson phones. Similarly, Apple lost many customer orders after an earthquake hit Taiwan in 1999.

In terms of risks there are two types: environmental and organisational.

Environmental Risks

These include natural disasters, hurricanes, earthquakes, tsunamis, etc. For example, the Kobe earthquake in Japan in 1994 impacted, amongst others, a California-based sound-card maker Kelly Micro Systems, causing a shortage of components, which resulted in disruptions in production and loss of revenue.

The Florida hurricane in 2004 caused huge shipping failures in the state impacting companies in Asia and triggered large losses.

In 2016, climate change resulted in the damage of coffee crops that Starbucks was heavily dependent on causing much disruption in both production and sale.

Given these issues, the transport and logistics parts of the supply chain are most vulnerable to natural disasters as ships, planes, and road links can easily be disrupted.

More recently, environmental risk also includes terrorism. Thus, deteriorating political relations between countries or political instability, change of regimes, etc., can also interfere with the free flow of goods and trade between countries and cause supply chain disruptions.

For example, Deutsche Post stopped delivering to Ukraine in 2016 due to political instability in the region. This impacted 620 German companies in the Ukraine.

 

In Turkey, the attempted coup in 2016 exemplified how vulnerable global supply chains can be to political upheaval. Without a stable government, supply chains will always experience problems at borders and check-posts.

Environmental risk also includes market risks. Shortage of skilled manpower in labour markets such as a lack of truck drivers or transport staff striking over wages can heavily impact the supply chain.

As supply chains become more globalised the number of link parties involved not only increases but the geographical distances between the primary company and the links makes it difficult to control and coordinate. Also, it becomes difficult to ensure compliance to norms, standards, and practices across geographical distances as well as across organisational boundaries.

Finally, there is a greater chance of theft, fraud, pilferage and other such risks within global supply chains given the larger number of players involved and the relative opacity of each step by the other.

Organisational Risks

These include risks within the boundaries of the organisation or supply chain such as the uncertainties of labor, of technology dependence, infrastructure dependence, and the integrity of the link parties in the supply chain. For example, the grid blackout on August 14, 2003, in the northeast region of the United States that significantly affected performance, is a prime example of this.

Further, if any link party or vendor becomes bankrupt or closes down, this would adversely affect the entire supply chain. There are also interactions and relationships between the organisation and the supply chain. Dissatisfaction over relations and interactions could result in less than optimal performance, lack of cooperation, or even conflict that could adversely impact supply chain performance.

Between local and global supply chains the risks are fairly similar. However, global supply chains tend to experience a higher degree of risk due to the numerous links between the wide network of parties and firms involved.

3PL Outsourcing
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3PL Outsourcing – Strategic Considerations

Third-party logistics or 3PL Outsourcing, is an option exercised by a business, wherein parts of its distribution and fulfilment services are outsourced to a third party. This can occur for a number of reasons including outdated facilities and warehousing systems, as the business does not have the internal capabilities internally and could be experiencing a reduction in efficiency, an increase in time and costs, as well as a decline in customer satisfaction.

Such ramifications could lead to the competitive advantage of the business, its market share, brand reputation, or profitability being diminished. Thus, to stem the tide, businesses have had to look for external solutions.

In other cases, businesses may have set-up in foreign markets and need to globalise their supply chains to better serve their customers. However, in such instances, being able to completely owning their own supply chain could be prohibitive and an entry barrier into certain global markets. Here, businesses require 3PL support to bridge the gap.

However, businesses do not always have to outsource parts of their elements to third parties. Another method could be that of vertical integration, wherein a business invests in developing and owning some of the sections of the supply chain. This can be exemplified by the Ford Motor Company, which owns forests and steel mills. Another option businesses could use is to franchise the supply chain, which provides relatively tight control and integration over the system rather than outsourcing it entirely.

3PL vendors typically provide services such as contract warehousing, packing and distribution services, transportation management, and freight and inventory management. Here, it is up to the business to analyse the areas where vendors are required and plug the holes as they best see fit.

There is also the relationship between businesses and vendors as many businesses are keen to look to vendors who can align with their goals and objectives, processes, standards and performance, and quality parameters. Such parameters can even be in the form of an economic contract or agreement between the two businesses though it has the risk of allowing vendors to exit the contract as they deem fit.

Thus, depending on the business, its health, performance, market positioning, services, and many other factors, the decision to outsource to third party vendors almost always remains a strategic one. In this regard, there are a number of considerations that businesses must address before entering into such a strategic decision.

Transaction costs are always at the heart of the decision to ‘buy’ or to ‘make’. Here, costs can boost overall, long-term growth or help entry into a new market.

Performance and predictability of performance is another criteria. Businesses are likely to choose those 3PL vendors who offer efficiency in planning, adapting, and monitoring, i.e. where performance is predictable and risk is minimised.

Value addition is another consideration. Businesses are keen to partner with those vendors who add value through embedded knowledge such as competitor behaviour, deep-domain expertise, and market understanding as well as certain unique capabilities. However, such capabilities or value additions are only ‘order getters’ and not ‘qualifiers’. The day-to-day ‘qualifiers’ for 3PL vendors still remain delivery reliability, speed, and price.

However, price may not always be an incentive for businesses. A sudden price drop could arouse doubts and reveal larger problems within a vendor’s functional area or core capabilities.

Further, a 3PL vendor’s IT capability is another significant area that businesses may examine within their own decision-making process. As IT is seen as an enabler to reducing costs, supporting innovation and service quality, it is a core area of scrutiny.

Another area for businesses is the ease of interaction or customer relationship. It is evident that positive and trustworthy customer interaction goes a long way and businesses tend to stay away from vendors who have been known to be ‘difficult to deal with’. Positive dealings could include taking responsibility for notifications about likely delays or identifying parcels that were late, or informing customers in advance along with the reasons for the delay. In today’s highly competitive market, customer satisfaction is paramount and businesses require a vendor who will ensure that delays are minimal, are clearly stated, and can even go the extra mile when systems break-down.

Of course, vendor size is also important. Here the capacity, scale, and reputation come into play. Depending on the nature of the business, companies may opt to choose larger or smaller players within certain markets. This, once again, depends on the business’ own situation within its growth and development cycle.

Finally, there is also the capability for innovation as another option for the selection of vendors by businesses. Innovation is seen as a significant value add and a great customer satisfaction elevator. Here, vendors known to be flexible, unique, or standing out within markets may well be viewed positively, especially where there is less freely open information.

However, despite these factors there are still challenges in the strategic decision-making process for businesses looking to partner with third parties. Some of these include unreasonable and unrealistic expectations from a buyer. For instance, customers may have unrealistic (and unreasonable) expectations that 3PL providers may have the effect of reducing their annual transportation expenditures by 50 percent. Though this is factually incorrect this perception must be addressed before a deal is struck. Not doing so could lead to severe consequences going forward.

In the end business must internally decide whether to opt to use 3PLs. This depends on their own growth strategy, vision, functionality, costs and market forces. Once a decision has been made however, there may space to nurture the partnership given that the right-fit provider has been sourced. To do this there must be clear and transparent communication between both parties, an assessment of ground market realities, and a clear understanding of each other’s capabilities. Of course, the relationship is key and businesses function best with both sides working together and collaborating closely – and in the area of logistics, distribution, and fulfilment, this requires even closer examination.

logistics
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Drones and the future of logistics

It’s a bird, it’s a plane…no, it’s an unmanned aerial vehicle (UAV) commonly known as a drone!

Though drones were initially conceived and have been used as a part of modern warfare in the past, they are now increasingly being looked at by businesses to reduce costs, save time and improve customer service.In fact, one of the world’s largest companies, Amazon, is their most famous use-case through its recent public testing of drones with Amazon Air. And given its global influence, it’s no wonder Amazon forced other companies to stand up and take note of the potential uses of drones within businesses.

Regardless, many companies have already been looking into the technology and are already testing drones and using them, albeit in a limited manner. More recently, the buzz around drones has been (due to Amazon) around delivery, wherein customers are delivered products and goods via drones. However, though they can be used in delivering food, small items and products, drones can also be used within development, recovery, and search and rescue missions. Given that there is potential for drones within development, reconstruction, and retail, it is also true that drones can have a huge and untapped potential within the logistics sector.

In fact, as per a new market research report Drone Logistics and Transportation Market by Solution (Warehousing, Shipping, Infrastructure, Software), Sector (Commercial, Military), Drone (Freight Drones, Passenger Drones, Ambulance Drones), and Region – Global Forecast to 2027, “the market is estimated to reach USD 11.20 Billion in 2022 and is projected to reach USD 29.06 Billion by 2027, at a CAGR of 21.01% from 2022 to 2027.” Thus, with such impressive growth figures predicted it is no wonder more players within the logistics sector are closely examining the future potential of drones.

So what exactly is a drone and why is it so important? In technical terms, a drone “is an unmanned aircraft” or “a flying robot.” It may be “remotely controlled or fly autonomously through software-controlled flight plans in their embedded systems working in conjunction with on-board sensors and GPS.”

As earlier mentioned, drones were first associated with the military for intelligence, anti-aircraft, and target practice. However, they now are more commonly used by civilians recreationally, by cinematographers in film, for weather monitoring, agriculture, surveillance, and even traffic assessment.

Within logistics and distribution there are two main types of drone delivery being explored – home drone delivery and supply chain delivery. Home drone delivery in more popular though supply chain delivery can be very important in saving time, costs and streamlining processes.

For warehouses, drones can be used to “randomize picking routes.” In order to improve utilization within warehouses, and where there aren’t fixed palletizers, by changing the “programming of aerial drones, pallets can be set-up as and when required.” Drones can also help replace conveyor systems in places where there are configuration problems.

Given the vast amounts of stock and inventory within the logistics sector, there is potential for drones to work as possible alternatives to trucks or other surface transport options. Here, they could be deployed between warehouses to ensure demand within a local or regional area is met and to balance and manage inventory levels.

One of the biggest issues facing businesses is claims/returns. Here, drones could be used to pick-up faulty products from customers and drop them to be replaced/fixed. Large retailers could benefit from having their logistics save time given the benefits of no road traffic or congestion as well as reduce efforts of human labor and save on fuel prices.

Going further, there is also scope for end customers within a limited and finite range to be served by drones. However, given the current restrictions on weight and package type only certain goods can be transported. Nevertheless there is still an untapped potential for companies looking at the last mile (when a package reaches a customer’s door) delivery and can help remove the need for humans, reduce cost of transport, labor, and save time.

Also, within a warehouses drones can help with safety issues such as being able to reach places where employees may face danger or accidents. In the event an accident has taken place drones can be sent to take pictures of accident-prone sites or, where there is a problem, can be deployed to help review/solve problems.

Further, as has been mentioned, there is even greater scope for drones to “offer the potential to increase flexibility and combine the speed of automated handling equipment with the scalability of a manual warehouse workforce.” Thus, a combination of a human-drone workforce can greatly improve efficiencies with warehouses. This can also be complemented by RFID-reading drones, which can “pinpoint and count tagged inventory stowed inside stand-trailers, making them invaluable for large distribution centers with outdoor goods-yards,” saving precious time and costs.

In terms of the future, there is a great deal of potential for drones to be used within the logistics sector. However, one of the biggest hurdles is their limited weight. At present, packages weighing more than 5 kg are hard to hold and there is a risk attached to them. For now, larger drones are more expensive and need more testing. Given this their range is also limited as is their speed and they can only embark on short trips.

There is also the issue of government regulation and the need for several licenses and procedures to be followed for commercial usage of drones. Here there are several grey areas and issues of security, surveillance, safety and risk need to be addressed. Thus, at present, only large players such as Amazon, Walmart, DHL, and UPS (among others) are actively using drones.

However, given the rapid pace of technology, innovation by businesses, and competition for increased customer loyalty, the future looks bright and it seems only a matter of time before drones, as part of the technology revolution, which includes AI, robotics, IoT, etc., will enter the mainstream and will inevitably become commonplace within the logistics sector.