Software is allowing businesses in certain industries to pool their knowledge and resources to make procurement and sourcing easier and more worry-free.

While the Internet creates risks such as identity theft and e-mail scams, it is reducing risk at the business level by fostering information-sharing. Today, businesses are using technology to help them manage the risks that lurk within each step of their supply chains. Software is allowing businesses in certain industries to pool their knowledge and resources to make procurement and sourcing easier and more worry-free.

Today’s supply chains are more rife with peril the longer and more efficient they seek to be. In a recent report from Deloitte Consulting titled Supply Chain’s Last Straw: A Vicious Cycle of Risk, the firm outlines how it discovered that the quest for greater supply chain efficiency has opened up companies to greater risks than ever before.

“The more efficient your company is, the more global your company is, the more at-risk your company is,” the firm says. “In a blind study of 25 leading companies with combined revenues of more than $1.5 trillion and a collective market cap of $2.3 trillion, Deloitte Consulting LLP found not one is fully prepared for the new genre of systemic risk, or S-risk, that exists today.”

According to the report, the drive to make supply chains more efficient has left more decisions up to pure cost considerations, and nudged human decision-making out of the equation. To a computer, “less money” will always equal “better than,” but the far-reaching implications of cutting those costs are almost never taken into consideration.

“The search for cheaper labor, cheaper raw materials and cheaper transportation – the quest for efficiency – has forced the focus of companies to switch from revenue growth to cost reduction,” Deloitte says. “And because of that quest, there is such low tolerance for delay today that companies will go to suppliers that can deliver what they need now.

“The speed and expanse of supply chains have become too complex for mere mortals to handle alone,” the report continues. “Enter technology. But an over-reliance on technology to handle the supply chain has led to black boxing or just-in-time management, where key decisions are being managed by microchips rather than real-life managers.”

Networking
Based on this assessment, operating with a supply chain that is efficient but does not open the company up to risks associated with split-second decisions means utilizing a system that operates quickly, but is still based on human understanding and knowledge. Wayne Smith, manager of global procurement and logistics for CVRD INCO, one of the world’s largest producers of nickel, says the large mining company achieved this by partnering with more than a dozen other mining companies to create Quadrem. Today, Quadrem is a transaction delivery network that connects more than 55,000 suppliers with more than 1,100 buyers globally, handling more than $16 billion in order throughput annually.

Smith says the company, at the time known as INCO, was looking for a way to use an electronic marketplace to help it with its supply chain needs in the late 1990s, and in particular focused its attention on a program from Michigan State University. “The good news about the work we did with them suggested that we were using a lot of good practices with managing our logistics and procurement,” Smith says, but that was only on a regional basis.

The company, based in Toronto, Ontario, Canada, also has operations in Manitoba as well as projects in Wales, Indonesia and Australia. “We were looking at how we were going to manage the business in a global way,” Smith says.

An electronic system was determined to be the fastest and most efficient way to go about it, but the existing electronic marketplaces weren’t up to INCO’s needs, Smith says. “They tended all to be very regional and really not too focused on the mining industry,” he says. That realization is what led INCO to join 15 other large mining companies, including its current parent company, CVRD, to create Quadrem.

Smith says working with Quadrem has proven beneficial for CVRD INCO and its other owners because it was developed as a global platform. It provides tools that free managers to make decisions based on what’s right for the company and because it has given them access to information about suppliers in unfamiliar areas. “Customers were running operations around the world, so it was incumbent on Quadrem as a company to operate globally,” Smith says.

The ease with which the new system allowed the company to review and administer bids also relieved the strain on its contract administrators. “We knew there was work getting to the marketplace unbid,” Smith says.

Sharing information about suppliers among mining companies becomes important when venturing into a new, unfamiliar territory, Smith adds. Whereas some approaches would have a company select a supplier based on nothing but cost, he says Quadrem gives companies a chance to become familiar with a region’s suppliers and their reputations ahead of time. “When you have a large mining group like that, we all have differing needs, but we probably need what’s being developed because we’re all in a similar business,” Smith says. “If it makes sense for them, it probably makes sense for us.”

‘Sinister Thinking’
Partnering with industry counterparts to create such a network can be one way to reduce the risks involved in making supply chains more efficient, but Deloitte’s report suggests other ways that can be done internally. “An experienced senior executive reporting directly to the CEO should be given responsibility for managing the S-risk of the company’s operations and brands,” the report says.

“An effective S-risk mitigation plan includes adequate preparation,” the report continues. “Each part of the company must be viewed as a potential target for disruption or attack – a process that requires creative, unorthodox and often sinister thinking to test a company’s actual crisis readiness and exposure to unidentified vulnerabilities.”

Success or Failure
In general, Smith says some tips to keep in mind for managing risk along the supply chain involve knowing as much as possible about your company’s capabilities, its resources and its suppliers. He says knowing your vendors and whether or not they can hold inventory and understand your company’s usage patterns is essential.

“A lot of those arrangements we have are with vendors who can service us within 24 hours,” he says. “Additionally, we are careful about using supply from a single source.”

Although some supply chain management is left to chance, Smith says strong management is often the difference between success and failure. “I guess an important piece [of advice] is [to have] senior management that supports supply chain as a critical strategic part of the business,” he says.

Smith credits INCO’s management team with allowing the company to do the benchmarking necessary to get Quadrem off the ground.

“[Benchmarking] allowed us to prepare a business case for management and take on the issues that we felt needed to be corrected,” he says. The result was an information highway that supports good decisions and relationships.