Changing expectations – supply chain visibility

Internal audit assurance is not what it used to be. Or at least it shouldn’t be!

Expectations of supply chain visibility have changed over the last two years; a pandemic, Brexit, heightened awareness of the climate crisis and now war in Ukraine. While the humanitarian impacts cannot be overshadowed, the reality here in the UK and Ireland for many organisations is intense operational pressure due to supply chain disruption.

Turn the clock back three years and it might have been okay to give a satisfactory rating to risk management that captured basic supplier details. A big tick might even have been given for having an alternative supplier thought about from a continuity perspective.

Has this ever really been satisfactory though? In a world of global supply chains, just-in-time stock management and unpredictable consumer demand, was it more a case of complacency because, in the main, okay was enough, and organisations rode out the odd blip that occurred?

The Suez Canal transports 12% of all global trade. In March 2021 the Ever Given grounded, blocking passage for six days and causing months of disruption due to the backlog of cargo. Since opening in 1869 it has only been closed five times, so it’s not surprising that its closure is considered a low likelihood risk, albeit with a huge impact when it occurs.

Knowing where goods and materials are sourced, manufactured and assembled is essential.

Interviewed by Forbes in April 2022, Jennifer Bisceglie, founder and CEO of Interos, a supply chain risk management company said that “we are experiencing the biggest shift in supply chains since the era of globalisation began—perpetual disruption is the new normal. Now and in the future, continuous real-time monitoring of every tier of [the] supply chain will be the norm to help companies get ahead of the next crisis.”

Visibility is about the controls that ensure survival from supply chain disruption; confidence in the flow of parts, materials and continuity of suppliers. Visibility can be achieved through mapping. Typical questions that are asked to gain visibility include:

• Where are factories located?
• What is made where?
• How critical is each component?
• What stock levels are maintained (weeks cover)?
• How long is the lead time?
• Where are components sourced from?
• Where are raw materials available from?
• What alternatives can replace critical components?
• Who else could manufacture the product?
• Is R&D looking for innovations to reduce dependency on components that are irreplaceable?

Current geopolitical tensions with Russia as a result of the war with Ukraine have highlighted dependencies that many organisations without visibility of their supply chain would have been unaware of. Russia and Ukraine are significant producers of commodities such as:

• Aluminium, steel, nickel, copper and iron
• Neon, palladium and platinum used in microchips (c90%) of neon comes from Russia (palladium is often found in items such as car exhausts, mobile phones and dental fillings)
• Key ingredients for fertilisers are largely sourced from Russia
• Timber and wood pulp used in paper products
• More than 25% of global wheat
• In excess of 50% of sunflower oil comes from Ukraine, long-term disruption is forecast

Supply chain disruption, including a global microchip shortage, has affected the supply of cars globally and rocketed the cost of used cars due to the long lead time for new purchases.  

Compounding supply chain issues is the energy crisis. The initial surge of gas prices in 2021 led to fertiliser plants in the UK becoming untenable and closed sending shockwaves through multiple sectors as their by-product, carbon dioxide, was no longer available. The government stepped in and continues to support the industry to maintain supplies as carbon dioxide is critical for everything from medical procedures, beverages and keeping food fresh.

Is your organisation alert to where untenable risks are emerging in its supply chain?

Supply chain visibility enables understanding of dependencies and awareness of risks that could lead to disruption. As pressure on suppliers increases organisations need to be alert to degradation of quality, use of fake materials and delays. Monitoring the financial health of critical suppliers is also good practice as it may be necessary to support them during difficult periods by extending credit terms, advancing payments or direct investment.

Visibility is also about managing supply chain complexity. It is a core element of achieving the United Nations 17 sustainable development goals covering everything from sustainability, monitoring anti-bribery and corruption, limiting environmental impacts, and ethical management of labour.

The war in Ukraine “signifies yet another trigger for the movement towards the de-globalization of supply chains” according to Sang Kim, professor of operations management at the Yale School of Management

• How effective is your organisation’s supply chain risk management?
• Is your internal audit assurance raising expectations or settling for okay?