Six Steps to Secure Global Supply Chains
Leveraging a risk management process to build an agile supply network and make a positive impact on the bottom line
Posted: July 28th, 2008 03:43 PM EDT
By Jim Le Tart

Supply chains are the lifeblood of retailers, distributors and manufacturers, yet threats abound all over the world. With globalization making supply chains longer and more complex, the risks keep increasing.

Terrorism has been the major focus (and cost) of supply chain security since 9/11, even though those threats to supply chains are remote. There are more immediate and disruptive threats more likely to impact supply chains — for instance, Hurricane Katrina, the toy recalls, the Minneapolis bridge collapse. In fact, a recent beef recall forced a nationally known meat company out of business.

Properly securing supply chains goes beyond mitigating risk; it also makes them more flexible and efficient. A 2006 study by Stanford University, the National Association of Manufacturers and IBM found that improvements in supply chain security led to:

• 38 percent reduction in theft, loss, or pilferage
• 12 percent increase in reported on-time delivery
• 14 percent reduction in excess inventory
• 49 percent reduction in cargo delays
• 29 percent reduction in transit times

That's why companies should change the traditional thinking of supply chain security as a necessary evil and instead think of it in terms of the bottom line. While natural and man-made disasters cannot be eliminated, companies can plan for them and mitigate the risk.

The keys to securing global supply chains are visibility to products at suppliers, in-transit and throughout the distribution network, as well as the ability to immediately take action when disruptions occur. Here are six steps companies can take to secure their global supply chains:

Step 1. Identify the Threat — A company must first understand which threats it is most susceptible to, the likelihood of these disruptions affecting the supply chain and the potential impact to its business. There certainly is no lack of threats — terrorist attacks, natural disasters, pandemics, and recalls, as well as theft, counterfeiting and organized crime, just to name a few.

A company should first consider those threats most likely to occur in its supply network and those that would have the greatest impact on its business. An oil company with major refineries along the Gulf Coast would be most concerned with hurricanes and terrorist attacks. A food company would fear product contamination. A pharmaceutical company's main concern would be counterfeiting. Theft might be the biggest problem for retailers.

In order to prioritize potential threats, a matrix should be set up that has the likelihood of occurrence along one axis and severity of impact along the other. A company should start working with those threats scoring highest on both axes and work its way down. This process likely overlaps corporate risk assessment efforts, so leverage this information to ensure supply chain and corporate goals are aligned.

Step 2. Create a Disruption Map — Once key threats are identified and prioritized, it is important to evaluate where they most likely could occur. A "disruption map" overlays these threat locations onto the global supply and distribution network to see where a company is most vulnerable, highlighting the areas of greatest impact. Threats do not typically affect supply networks evenly, so steps taken to secure the supply chain will vary based on the threat and location.

The flip side to this analysis is to identify opportunities. If a company manufactures or sells products in high demand before or after a natural disaster, a surge strategy quickly stocks high-demand items in stores and nearby distribution centers, generating additional revenue as well as great PR. Planning alternate distribution routes is critical here.

Step 3. Design Security and Recovery Plans — Mitigating risk reduces the opportunity for threats to impact the supply chain, while carefully planning responses to threats a company cannot control minimizes the impact and aids quick recovery.

To prevent threats from significantly harming a business, companies must think in terms of redundancy. When examining the disruption map, companies should look for alternate ways to source, ship and distribute products so no link in the chain becomes a chokepoint — and a major liability — during a disruption.

Creating this redundancy does not necessarily mean added cost. In many cases, multiple suppliers, carriers and distribution centers are already part of the supply chain. Plan alternatives and get agreement from all parties ahead of time to be flexible and handle surges in volume. Adding additional suppliers or carriers may also spur competition, leading to lower prices, innovation and improved service.

Disruptions can affect the supply chain no matter how well a company plans because so many things are beyond its control. Recovery plans can get networks back to normal quickly and efficiently. They should define alternate supply sources, rerouting of supply and distribution lines, and movement of people, equipment and supplies into affected areas. Where disruption events can be forecast (i.e., hurricanes or blizzards), pre-staging equipment and supplies speeds their deployment into impacted areas.

Security and recovery plans should be written out in detail and agreed upon by all parties involved, both internally and externally. If a company doesn't do this, the chances of reacting effectively in a crisis are minimal.

Step 4. Leverage Technology — Technology is critical to securing global supply chains, providing visibility to products and assets across extended networks so companies can immediately take action.

The technology making this possible is the same technology making supply chains more agile and efficient. A number of different, yet integrated technologies are discussed in the accompanying story (see sidebar), showing how they can secure and improve supply chain operations. They include network-wide visibility, asset management, transportation and global trade management, demand forecasting, quality assurance and recall, and workforce management applications. By more effectively leveraging existing technology, operations become more agile, efficient and resilient, and better able to quickly recover from disruptions.

Step 5. Test, Test, Test — Periodically testing security and recovery plans is the only way to know whether they will actually work when a real disruption occurs. Many companies hold emergency response drills that simulate disasters and test the procedures for evacuating injured and other personnel, but few simulate the impact on supply chains.

A thorough testing program simulates disruptions and defines benchmarks for recovery processes. Separate test plans should be developed for each disruption scenario. It is important to accurately simulate each disruption's impact on inventory, physical plant, people and external parties.

There are two stages to testing. First, conduct well-communicated, controlled tests to walk the organization and third parties through the process. This identifies gaps in the plan and gets everyone comfortable with reacting to each scenario. Then conduct surprise tests to see how the plan — and people — hold up under pressure. Without surprise tests, a company doesn't know how well it will react when a real event occurs.

Depending on the extent of the test, a company may want to let customers know ahead of time just in case the test results create temporary glitches in delivery. Many customers will accept this small risk if they understand it means a company will be better able to serve them during a disruption. Others will not and the test plan will need to work around them.

Step 6. Reevaluate Risks — Supply chains are never static, and neither are the threats. It's critical to reevaluate potential disruption scenarios and supply chain operations regularly to ensure security and recovery plans reflect and support operations as they and the environment change over time.

During this reevaluation, a company may want to move down the list of potential disruptions to begin addressing the next tier of threats not covered earlier. Over subsequent loops through this six-step process, a company can leverage previous work to build ever-broader coverage of potential threats, further reducing risks. This creates further supply chain efficiencies, turning these efforts into a de facto continuous improvement program.

These six steps mitigate as much as possible the risks these threats pose to a supply chain. They also make the supply chain more agile and efficient, turning security from a necessary evil to a source of greater efficiencies positively affecting the bottom line.

Supermarket Chains Narrow Their Sights

Friday, August 08, 2008

 

ONE of the biggest brand names in food this summer doesn't carry a trademark. It's the word "local," which has entered the language as a powerful symbol of high quality and goodness.

 

Supermarkets are beginning to catch on that stocking corn and tomatoes grown nearby is not enough for customers. Now they are competing with farm stands and farmers' markets for a wider variety of fresh fruits and vegetables.

 

It's been a boon for local farmers. Ten years ago local produce was devalued at the wholesale Hunts Point market, said Lyle Wells, whose family has been farming on Long Island since 1660. "Now you can't get enough of the stuff."

 

Last month Wal-Mart announced that it plans to spend $400 million this year on locally grown produce, making it the largest player in that market.

 

"When Wal-Mart makes a major effort to reach out to local food systems, it's a major signal," said Gus Schumacher Jr., a consultant to the nonprofit Kellogg Foundation and a former Massachusetts commissioner of food and agriculture, who has worked to introduce farmers to restaurateurs and retailers since the 1980s.

Some independently owned, small-to-medium-size chains have been selling extensive lines of local seasonal fruits and vegetables for years, lines they are now expanding.

 

For the largest supermarket chains, though, where for decades produce has meant truckloads transported primarily from the West Coast, it's not always easy to switch to the farmer down the road.

 

But soaring transportation costs, not to mention the cachet customers attach to local food, have made it more attractive not just to supermarkets but to the agribusiness companies that supply them.

Growers like Dole and Nunes have contracted with farmers in the East to grow products like broccoli and leafy greens that they used to ship from the West Coast. Because of fuel costs, in some instances the cost of freight is more than the cost of the products.

 

"There is a huge shift," said Brian Nicholson, an owner of Red Jacket Orchards in Geneva, N.Y., who has also become a distributor for local farmers. "Wholesalers and retailers no longer say, I can get it cheaper from out West."

Some supermarket chains are allowing farmers' markets to take over part of their parking lots on certain days; others have put a farmers' market right inside the store.

 

But not all chains are there yet. "The whole commercial value of local is just now being appreciated by retail," said Bill Bishop, chairman of Willard Bishop, retail marketing consultants in Barrington, Ill. "It's a little bit behind the curve."

Hannaford Brothers, with 165 stores in New York, Vermont, New Hampshire, Maine and Massachusetts, has always sold local produce, but in the last two years its customers have pushed it to offer more. "There's been a 20 percent increase in sales" in the last year, said Michael Norton, a company spokesman. "Our research tells us consumers have about five or six reasons for wanting local: freshness and taste; keeping farmland in the community and having open spaces; a desire to be close to the food source and know where it comes from; support of local farmers and keeping money in the community. Embedded in all of this is concern about food safety. All this creates pretty powerful interest."

Will Wedge, director of produce for the chain, said that in company surveys, "82 percent of all customers told us loud and clear, locally grown produce tastes better. We have over 200 farmers selling over 50 different commodities, primarily from June through September."

 

Wegmans Food Markets, a 71-store chain based in New York with locations in Pennsylvania, New Jersey, Maryland and Virginia, has been buying from local farmers for the last 20 years. Today it has 800 farmers and has also experienced a 20 percent increase in sales of local produce over the past year. "There's a real emotional connection with local," said Dave Corsi, vice president for produce.

 

Mr. Corsi said that in order to buy from local farms, the chain had to stop acting like a chain. "We don't control these relationships centrally — the produce manager in each store does this directly," he said. "We only guide the stores."

 

The King Kullen Grocery Company, with 45 stores, all but one on Long Island, has become famous for its local produce, but it took a while. Tom Cullen, a vice president of the family-owned chain, said the company started to buy from local farms 12 years ago but it didn't work out because neither the quality nor the supply was consistent. "It's taken years to build trust with farmers," he said.

Some of the early attempts by retailers have shown that local does not always mean better.

In New York last week there was no discernible difference between blueberries from New Jersey and those from California at Food Emporium, both priced the same. Jersey tomatoes at Whole Foods were barely more flavorful than those from away. Packaged plums and apricots at both stores were hard as rocks, and the corn was not really fresh.

 

Mr. Bishop said he wasn't surprised. "Part of being new means not completely perfected. To a significant number of shoppers it seems logical that local has the connotation of being fresher and better tasting, but it isn't necessarily so."

 

Several companies and nonprofits are working to put farmers and supermarket executives together to iron out the kinks. A major focus of Karp Resources of Southold, N.Y., is how to re-regionalize the food system.

 

"Regional agriculture systems in the Northeast, mid-Atlantic and Southeast are really quite broken," said Karen Karp, the president of the company. "Small farmers can sell direct, but there is no infrastructure for middle-sized farmers to get stuff into supermarkets." There are no warehouses, limited trucking facilities and few distributors.

These growers are used to picking the zucchini and bringing it to a stall at a farmers' market. In order to sell to grocery stores, they have to learn pricing, invoicing and ordering systems as well as post-harvest handling techniques that include chilling, sorting and grading for size and color.

 

Big retailers have even more work to do. Used to making just a few phone calls to large produce distributors, often thousands of miles away, they do not have the setup or the personnel to deal with individual farmers who deliver to the back door.

 

Some of them are reluctant to do so and small farmers either have to join a co-op or find a distributor who can deliver to the supermarket's warehouse.

 

The chains also have to change their purchasing practices to make room for seasonal local produce instead of being locked into a year-round contract with one source in order to insure the lowest prices.

 

"It takes innovation and reallocation of resources," said Mr. Nicholson of Red Jacket Orchards. "It takes passion, and patience to get good collaboration. They have to be willing to spend more money because it's costlier buying from small growers."

 

Ms. Karp said: "If retailers want to deal with these farmers they can no longer push all the risk about food safety and quality assurance back on the individual farmers, who can't bear those costs."

 

Joe Casa, owner of Harbor View Foods, on Long Island, knows the difficulties firsthand. Mr. Casa's company helps growers and markets communicate, telling stores what is ripe in the fields and telling farmers what produce managers will buy. After he convinced some East End farmers to grow extra produce for the Great Atlantic & Pacific Tea Company, which owns Food Emporium, Pathmark and Waldbaum's, the process stalled. "It's hard to make things happen at A.&P., to get approval from top management," Mr. Casa said. "I told them I had stuck my neck out to get farmers to grow extra stuff for them, but I couldn't get an answer from them."

 

The impasse was resolved when the Long Island Farm Bureau called Senator Charles E. Schumer and told him that a number of farmers might be stuck with unsold produce. He agreed to intervene and soon enough the senator and the chain held a press conference to announce that Long Island produce would be available in some of its stores.

 

Despite the difficulties, many in the food industry believe the demand for local food is here to stay. "It's going to be a way of life," said Matt Seeley, vice president for marketing of the Nunes Company, which sells Foxy brand vegetables. "I don't think there is any turning back."