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BY JOYCE KLINE, ACCENTURE

Supply chain risk has becomemore problematic than ever be-foreand the increasing need topenetrate emerging markets isonly making the probiem moreacute. Here are five broad-reach-ing steps shippers can tai

Emerging markets, continued

Increased inventoriesand safety stock

Forward buying/hedgingstrategies

DevelopingI

Sourcingof contingentsuppi iers and/or i ogis-

tics providersForrmi r isl( tnuiagertEnt

program

EstabI ishing an inten-tionaily geographical lydistr ibuted supply base

Mature

Figure 1: A continuum of suppiy chainrisk-mitigation approaches.

grown fruits and vegetables to rot beforedelivery.

Political structures and policiesalso enhance risk, since they're nearlyalways more restrictive in emergingmarkets. Even in the European Union(EU) supply chain risk is elevatedbecause cabotage (intranational trans-port) is zealously controlled. Haulersbased in one EU country usually arenot allowed to travel between pointswithin another EU country.

Or take China, which periodicallyimposes licensing, health, technical,and packaging restrictions that putforeign companies at a disadvantage.China recently released a draft regula-tion requiring "one dealer license, oneproduct" in the auto sector, effectivelypreventing newcomers from usingexisting distribution channels andgiving domestic manufacturers moretime to prepare for direct competition.Figuring out how to surmount theserisks is core to the challenge of globaloperations.

But risk has another, even more dire,component: anticipating and respond-ing to unanticipated calamities. In arecent column in Logistics Management(www.logisticsmgmt.com), we profileda 2006 Accenture study on risk man-agement and mitigation. The resultswere sobering: Seventy-three percentof companies have experienced supply

chain disruptions in the past five years.Of those, executives at nearly 32 per-cent said it took more than 'one monthto recover and 36 percent said it tookbetween one week and one month torecover.

The vast majority (94 percent) saidthe disruption affected profitability andtheir companys ability to meet cus-tomer expectations. Fifty-six percentsaid the impact on customer expec-tations was moderate or significant.The report also identified the source ofmost upheavals and the frequency withwhich they were cited by respondents:

Poor performance of supply chainpartners (38 percent). Volatility of fuel prices (37 percent). Natural disasters (35 percent). Inability to deal with logisticscapacity or complexity issues (33percent). Inaccurate plans and forecasts (30percent).The bottom line is twofold: Supply

chain risk has become more ubiqui-tous and problematic than ever before,and companies' increasing need topenetrate emerging markets will onlymake the problem more acute.

REFINING THE STRATEGYA company's first-tier response to

global risk should be obvious: developand refine a global operating strategy.That strategy must begin by confirm-ing the primary reason for addressingan emerging market. Is it to find new

On both sides, selling and sourcing, thekey is aligning market-entry objectiveswith the supply chain characteristics thattypify each country or region. What worksin Brazil may not work in China.

sources of supply? Increase revenuesby attracting new buyers? Introducenew products or product lines?

If the objective is to increase rev-enues by tapping hot new markets, it'sessential that the company understandon a market-by-market basis the readi-ness and appropriateness of its prod-uct portfolio, logistics channels, make/buy approaches, and sales/marketingsupport functions. If the goal is newsourcing opportunities, the make-or-break factor could be the right sourc-ing model: Work with trading agents?Form local joint ventures or whollyowned foreign enterprises? Buildinternational procurement offices? Onboth sides (selling and sourcing), thekey is aligning market-entry objectiveswith the supply chain characteristicsthat typify each country or region.What works in Brazil may not work inChina.

The above generalities may be use-ful up to a point. But they don't speakto the specific issue of risk. In its mostrecent (2006) study of global opera-tions, Accenture found that the globaloperations strategies of most compa-nies were not developed with specificattention to managing supply chainrisk. Three-quarters of the survey's 300respondents noted that their companieshave not fully integrated risk-mitigationwith their global operations strategy.Ten percent have done nothing what-soever. In addition, more than half ofthe survey respondents stated that theirglobal operations strategies have actu-ally increased supply chain risk. Only13 percent said that risk dropped as aresult of implementing/upgrading theirglobal operations strategy.

So what are the right ways to mini-mize the risks associated with emerg-ing markets? And what is the right wayto make those approaches part of anevolving, continuously improving global

42 LOGISTICS MANAGEMENT WWW.LOGISTICSMGMT.COM | May 2007

Emerging markets, continued

operations strategy? Natu-rally, there are hundredsof individual steps that canbe taken to reduce supplychain risk.

However, research byAccenture has identifiedfive of the most far-reach-ing and significant. Asshown in Figure 1, eachresides on a continuum of"supply chain maturity,"

1Increasing inventories and safetystocks is a viable and widelypracticed option. However,it's also' a buffer strategy that's typi-cally employed by companies seek-ing a foothold in an emerging market.And it can be costly, and thereforeless likely to align with the company'sbroader inventory management objec-tives or the wishes of its C-suite,

2Forward buying/hedging strategiesalso can mitigate risk by ensur-ing the cost-effective acquisi-tion of needed products and materielfrom emerging markets. However, aforward buying and hedging strategymust be evaluated in light of each spe-cific purchase. Acquiring supply-con-strained materials such as titaniumwill likely be viewed as strategic. Buthedging on a more readily availablecommodity would likely be an inap-propriate risk-abatement solution,

3Building contingency relation-ships with additional suppliers orlogistics services providers is oftena good way to prepare for potential dis-ruptions in supply, unless it somehowdetracts from companies' valued rela-tionships with current supply chain part-ners. However, this is not a simple short-term initiative, nor is it easy to undo.

New relationships increase agilityand potentially reduce risk, but theytake time. The key is ensuring that pro-spective partners are highly qualified,and that their supply chain processesare compatible with those in placeat the companies that engage them.Take the case of a leading high-techcompany seeking to maintain opera-tions in the wake of the Indonesiantsunamis. Strong contingency relation-ships enabled it to move supply and

Risk-Mitigatioii Strategy Maturity | Strategy i Strategy DeeiiEd l Strategy Deeiipcl ' EffectivenessLevel i in Place ' Effective i Ineffective : Gap

INCREASED INVENTORIES AND SAFETY STOCK

FORWARD BUYING/HEDGING

SOURCING CONTINGENT SUPPLIERS

FORMAL RISK MANAGEMENT PROGRAM

GEOGRAPHICALLY DISTRIBUTED SUPPLY BASE

1

2

3

4

5

43%

54%

42%

48%

40%

46%

57%

54%

52%

49%

39%

50%

27%

42%

27%

+7

+7

+27

+10

+22

Figure 2: Responses to a 2006 Accenture study on Supply Chain Risk Manage-ment. Survey recipients were asked: "Which of the foliowing processes do youhave in piace to identify and mitigate suppiy chain risks, and how effectivehave they been?"

production from its Asian operationsto alternate venues in North Americaand Europe, At no time did this shiftimpact the company's customers,

4 Further along the continuum isthe development of a formal riskmanagement program that clearlydefines and prescribes a company'srange of responses to a potential dis-ruption. In simplest terms, this involvesthe development of a structured, inte-grated "resilience life cycle" acrosswhich companies:

Identify and categorize risks, Monitor threats, Circulate information and alerts, Develop mechanisms for mini-mizing the effect of disruptions, Prefabricate and enact potentialresponses, Develop mechanisms for recover-ing in the most rapid and efficient wayMeasure performance and develop-metrics for continuous improvement,

5The most "mature" example ofsupply chain risk mitigation is anintentionally geographically dis-tributed supply basethe operativeword here is intentionally. Many com-panies seek to develop an extendedsupply chain in order to reduce cost andmaintain competitiveness. As a result,suppliers in emerging markets are oftentargeted. However, the qualificationprocess can be long, and ensuring cer-tainty of supply is always challenging.

In the high-tech and aerospaceindustries, for example, supplier quali-fication can take 12 months or more.Another challenge associated with dis-tributed supply bases is the more com-plex (and potentially more expensive)circulation of material for assemblyor point of use. Simply put, emerging

markets and intentionally distributedsupply bases are poster children forthe design of insightful, innovativeglobal operations strategies,

INTEGRATING MITIGATIONIt is interesting to note that Accen-

ture-researched companies haven't nec-essarily enacted the five practices in thesame sequence we have just described.As shown in Figure 2, forward buying/hedging is used more widely than the"less mature" practice of increasinginventories and safety stock.

Yet both have the narrowest"effectiveness gap"the differencebetween those companies deemingthe practice effective versus ineffec-tive, Cenerally speaking, however,the more mature practices have beenenacted by fewer companies andhave a significantly higher level ofperceived effectiveness.

In net, every emerging market andevery supply chain strategy has its owncadre of risks. Though there are hun-dreds of responses, most are mirrors orsubsets of the five strategies we've justdiscussed. We should also highlight thatcompanies bent on high performancedevelop their global operations strate-gies knowing that built-in risk manage-ment programs are critical. These com-panies balance their emerging marketobjectives against the related (and doc-umented) risk. In fact, it's often highexpertise, high expectations and, mostof all, high levels of preparedness thatmake them high performers.

Joyce Kline is a senior manager in theAccenture Supply Chain Managem.entStrategy practice. Based in Boston,she can he reached at joyce.s.klineaccenture.com.

44 LOGISTICS MANAGEIVIENT WWW.LOGISTICSMGMTCOM | May 2007