Risks in supply chains

Roger OakdenGlobal Logistics

Risks are not always the same.

When considering the risks associated with supply chains, you could assume they would be the same for all businesses with similar products, or goods obtained from particular countries. But is this correct?

In global supply chains, the majority of risks are actually generated within the buying organisation. The reason being that at least two thirds of global trade consists of goods being moved between subsidiaries of multi-national companies (MNCs).

This situation is highlighted by the automotive assemblers located in Australia. There are three, Toyota, General Motors and Ford; the largest being Toyota, with sales of $A7.2b. The telling figure in the Australian subsidiary accounts is that 78% of cost of sales were generated with related parties elsewhere in the world of Toyota. With cost of sales at 90% of sales, this subsidiary’s role is to utilise the output of other divisions and subsidiaries and therefore transfer purchase payments outside Australia.

This example illustrates that as MNCs establish subsidiaries and divisions in their home country and around the world, it can be for different reasons It may be due to proximity of materials, lower costs (particularly labour), government regulations concerning a licence to operate a business, the tax regime, claiming government subsidies and many others. Rarely would the reason be to improve the supply chains for subsidiary operations around the world.

As subsidiaries will have restricted decisions concerning from which company owned factory a particular item will be obtained, the risks associated with these international sales or transfers will therefore be logistics based. For example, a logistics planning risk will be whether the supplying factories will have the capacity to supply according to schedule. This is critical when a low sales volume subsidiary receives supplies from a high volume subsidiary, especially if the item or its packaging have to be modified to meet regulations of the customer country.

Another logistics risk is availability of the required transport modes, especially if the supplying subsidiary is located in an area where there are subsidiaries of other MNCs and they all want similar transport capacity at the same times of the year.  Increased freight rates, less efficient freight arrangements, or higher inventory holding costs can be the result.

Where a purchased item is obtained from non-associated suppliers, the logistics risks would be identified  within the sourcing plan and if a high likelihood of occurrence existed, then the potential supplier would be downgraded. With tied suppliers there is less choice, therefore potentially higher logistics risks.

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About the Author

Roger Oakden

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With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More...