Global Supply Chain Risk Management and the Recent China Disaster

Tianjin

No, we’re not talking about the Chinese stock market – this is about the 2 August explosions in Tianjin, China, which killed at least 160 people and injured at least 1,000, as well as caused more than $1 billion in insurance claims for the direct damages and disrupted operations at one of the world’s busiest ports. The blast is going to have profound impacts on many multinational corporations’ supply chains. The Tianjin port is the largest in northern China and among the top 10 busiest ports in the world.

It’s become clear that operational oversight at the port and surrounding facilities has been far from compliant with Chinese regulations. True to form, Chinese authorities quickly fired the person in charge of work safety regulations – Yang Dongliang, now former chief of the State Administration of Work Safety –due to alleged corruption. Twitter accounts and bloggers in China have been shut down – Orwellian information management that is hard to pull off in the Internet era.

That aside, whether owing to bribes or poor oversight, the fact that 700 tons of sodium cyanide were stored in the facility is a sign that something went very wrong. Official Chinese guidelines allow for storage of a maximum of 10 tons of the chemical – meaning the stored quantities were 70 times beyond what is permitted. The spill resulted in exposure readings exceeding nearly 300 times the permissible allowance.

Cyanide is lethal in even minute quantities. Fortunately, it is well established how to clean up sodium cyanide spills and if done properly is not expected to result in lasting problems – strange as that may sound when 700 tons are involved. Among other uses, the chemical is commonly used in mining industries to extract gold as well as to support organic synthesis in the pharmaceutical industry.

Calcium carbide is considered as perhaps the origin of the explosion – a chemical used in the manufacturing of PVC, among other materials.

Resilinc Interview and Spend Matters Perspective

Spend Matters had the opportunity to talk with Bindiya Vakil, CEO and founder of Resilinc, about the impact of the events in China. Resilinc is a provider of supply chain risk intelligence and analytics. Its cloud-based solution is focused on monitoring geopolitical and other events that can have an impact on a company’s supply chain. The company is one of Spend Matters 50 Providers to Watch. Bindiya’s position puts her right in the middle of all the information coming out about the event in China. The following is Spend Matters commentary based on the interview and discussion with Bindiya Vakil:

  • Resilinc has mapped around 200 sites in the greater Tianjin area in the global supply chain risk management (GSCRM) solution for its clients, and about 30 of those are within a 10–15 mile radius from the disaster zone. (Note that Resilinc’s clients are Global 2000 firms with complex supply chains and extensive outsourcing relationships, so these supplier sites are likely in use across a large set of the G2000 organizations.)
  • Even if the immediately cordoned-off area was confined to a 2-mile radius, the explosion took out windows at distances of 10 miles away from the explosion. So the impact is more substantial than even the news reports suggest.
  • There are close to 200 industrial parks in the Tianjin area, with several in the immediate exposure zone, including the Tianjin Economic-Technology Development Area (TEDA) and the Tianjin Binhai Hi-Tech Industrial Development Area (TBHIDA), which is where the explosion took place, as well as others. The China Automobile Dealers Association (CADA) is also affected, as the Tianjin port handled about 40% of China’s automotive imports in 2014.
  • The infrastructure damage is extensive. In addition to all of the immediate damage near the explosion, and the 10-mile radius where windows were shattered, there has been road damage, trains shut down and, perhaps most critically, IT system damage. The latter part is critical to processing the necessary paperwork and documentation to clear the port – if not required by the Chinese authorities, then definitely required by the receiving countries’ customs authorities.  Nothing can be processed without Internet connectivity, so early Chinese claims that “the terminals can handle the processing” is not likely to work.
  • More than 17,000 homes have sustained damage, impacting more than 30,000 people. Expats and senior managers are staying home. Some are taking their families out of the region, or perhaps even out of the country. The loss of leadership will also cripple operations. Fixing the immediate infrastructure damage will take months.
  • Short-term impact: The nearby ports have nothing near the Tianjin capacity. We can expect severe delays over the next 8 weeks, likely not completely fixed until January 2016 or thereafter.
  • Long-term impact: China being the supplier to the world, we can expect lingering effects for another 6-12 months out. Automotive, machinery and particularly electronics have huge dependencies in Tianjin. (Slightly cynically speaking, Spend Matters predicts that we will see China and Chinese suppliers use the Tianjin disaster as an excuse/justification for any kind of economic or business setbacks, price increases or delivery delays over the next 6-12 months, regardless of underlying issue.)
  • Single source danger: Just as in 2011 Fukushima nuclear disaster and the 2004 Thailand tsunami, the Tianjin area has several suppliers that are in sole source relationships with their Western customers.
  • Compliance: As mentioned earlier, this word has not been taken seriously in Tianjin, and it is likely that Chinese authorities will clamp down hard on this, in order to instill confidence. This will of course introduce steps in the process that were previously not there, which will further slow down the ramp-up. There could be cascading effects as examples are made out of locations in violation, and perhaps shutdowns. Beijing has already shut down (or suspended) more than 100 chemical firms across 7 provinces because of violations. As an example, Chinese inspectors found safety hazards at 70% of Beijing chemical firms. Another statistic mentioned is that out of 124 inspected sites in the Beijing area, 85 failed to pass. Some violations are likely to arise from “off-book” activities involving illegal export activities.
  • Western firms are in a bind, too. The violations are not just involving Chinese firms. Numerous Western-owned businesses in China have also been found to be at fault. Some suggest that the violations were condoned by the foreign owners, as the Chinese location had been chosen specifically as a way to circumvent more stringent regulations in the West. Regardless of the reason, it clearly points to a lack of stewardship, lack of effective management and, perhaps most critically, a lack of visibility into local operations.

Takeaways

What can companies do to be better prepared in the future? I asked Bindiya this, and obviously she suggests using a global supply chain risk management (GSCRM) solution as the one Resilinc offers. This is a fair point – if you don’t have the data, how can you manage and respond? While it is still too early to say how much time and money her clients have saved from being able to react more quickly to the events in Tianjin, I can confirm – after talking directly with practitioners using GSCRM solutions such as the one from Resilinc, as well as with the competing German company riskmethods that the value to internal users from being able to visualize their complex supply chain in a single presentation layer is immensely valuable. Addresses in a spreadsheet don’t tell a compelling story, but seeing it all on a map is powerful.

Visibility: Regardless of how companies go about gaining this visibility, it is clear that for any firm with an extended global supply chain, there needs to be a way to immediately understand which products, parts and compounds are at risk. Additionally, be able to tie this back to the revenue at risk. A small investment in the right IT solutions and data visibility will pay off in a big way next time something like this takes place – and perhaps even help highlight where excessive risk exposure exists prior to a disaster taking place.

Heroes: Bindiya closed with talking about procurement’s “hero” mentality – rolling up the sleeves and diving into fix whatever fire is under way. As admirable as this quality is, she suggests taking a step or 2 back, assessing the potential supply chain impact before things blow up and assessing the full cost of recovery actions and mitigation efforts should help procurement become more effective and better align the overall risk and cost exposure that supply base decisions bring about.

Discuss this:

Your email address will not be published. Required fields are marked *