Procurement’s Vulnerability to Natural Disasters

Spend Matters welcomes this guest article by Diptarup Chakraborti, AVP Marketing, Zycus.

As a result of efforts to reduce costs, increase service levels and improve product quality, our supply chains now cover a greater a geographic distance than ever before.

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While the decision to outsource and shift production away from traditional, high-cost economies in the US and Western Europe reaped significant cost benefits, they have also left organizations open to a far greater risk with regards to the stability and vulnerability of their supply chains. Never before has supply chain risk sat so physically far away from those that are meant to be managing it. Our increased reliance on global sourcing as an avenue of competitive advantage means that our organizations now carry a far greater exposure to the impacts of natural disasters.

The recent earthquake in Nepal has provided a devastating reminder of this. Indeed, the event itself is catastrophic and the loss of life almost unimaginable, however, the continued impact these events have on people, both locally in Nepal and across the globe, continue to reverberate long after the ground has stopped shaking.

Are We Too Lean?

With so many organizations moving toward a lean or just-in-time approach to sourcing and logistics, are our supply chains capable of standing up to the unpredictable but inevitable challenges of natural disasters?

Lean methodologies suggest that organization can save money through efficiencies if they are able to reduce waste and optimize workflow throughout their operations. For procurement teams, this has meant placing heavy importance on cost savings and inventory reduction policies. Organizations began to look to overseas markets in order to reduce their cost of goods sold and provide what their customers needed at a lower unit price. Furthermore, in order to increase their cash position many firms reduced inventory and stock levels to the bare minimum required to service demand. Excess stock meant that cash had been spent unnecessarily.

The short-term benefits of these sorts of projects are well documented. However, the longer-term risk exposure of lengthening our supply chains and reducing the amount of inventory we hold was not perhaps fully considered. Given that global supply chains are certain to remain a steadfast pillar of the procurement function over the coming years, it is essential that procurement professionals begin to analyze, identify and manage the risk associated with moving parts of the supply chain offshore particularly in response to natural disasters.

Our Supply Chains Are Longer

It’s fair to say that supply chains of 20 or 30 years ago were simpler than today. Organizations traditionally sourced the products and services they required at a local or national level. The only time these organizations came under threat from a natural disaster was when it occurred close to home. When disaster did strike, it did so in close proximity the team’s operations and in an environment (both physical and political) that was familiar. Natural disasters overseas or even in a different state or county would seldom have had the potential to impact a supply chain.

Today’s modern procurement landscape, however, is reliant on stability across a number of geographic locations. Parts vital for operations may be bought from one region, constructed or assembled in another, and then distributed from yet another geography. These distribution chains may span a continent, but more often than not span the globe. The critical path for the goods we buy now passes through more economies, countries and political systems than ever before. As a result, the footprint exposed to natural disaster is infinitely larger than it once was.

The political strength and infrastructure level (or lack thereof) of the countries our supply chains now operate in are further factors that can magnify an organizations’ vulnerability to natural disasters. Organizations need to be able to react swiftly when disaster strikes, and while we may understand the political landscape in our own countries, managing this in a developing economy with limited infrastructure capabilities presents a significant challenge.

The Push to Meet Consumer Demands

It is not only the move to foreign shores that has exposed our supply chains to increased risk from natural disasters. At home, the ongoing pressure to reduce cost combined with our insatiable appetite to consume, has forced organizations in our supply chains to be begin farming, mining and utilizing more marginal land. Rivers have been dammed and diverted, farms have moved onto flood plains and irrigation and fertilizers use are at their highest ever levels. In order to feed an increase in consumer demands, we are now operating in and harnessing land that in the past was deemed not suitable or too dangerous to work. Our propensity to take on risk has increased, and in doing so, so too has our exposure to natural disasters.

While outsourcing and leveraging global supply chains certainly has a place in today’s business landscape, procurement professionals must enter in to these ventures fully aware of the risks that such decisions carry. While we can’t predict exactly when or where natural disasters will occur, we can take proactive steps toward managing and responding to these threats. We will touch on this topic again in a future post detailing some critical steps procurement teams can take in order to prepare themselves for natural disasters.

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