South Africa: Companies With Mature Supply Chain Capabilities Are More Resilient To Supply Chain Disruptions, According To MIT And PWC Study

Last Updated: 15 January 2014
Article by Jonathan Cawood

The majority of organisations globally recognise that supply chain disruptions can have a serious effect on a company's bottom line and financial performance, according to a report conducted by the Massachusetts Institute of Technology (MIT) and PwC. Despite this stark reality, 60 percent of companies pay only marginal attention to risk reduction processes. These companies are categorised as having immature risk processes. They mitigate risk by either increasing capacity or strategically positioning additional inventory.

"This is not a surprise as the survey also shows that most of these companies are focused either on maximising profit, minimising costs or maintaining service levels," says Jonathan Cawood, Strategy & Operations Leader for PwC Southern Africa. "Stressed supply chains that already have to cope with cost, competitor and quality challenges are vulnerable to disruptions from natural or manmade forces. Supply chain disruptions can cause serious damage to profitability, shareholder value and even reputation," adds Cawood.

The 'Supply Chain Risk Management Survey' analyses the supply chain operations and risk management approaches of large companies and looks at their operations and financial performance in the wake of supply chain disruptions. A total of 209 companies with global operations completed the survey. The study proposes a framework and a set of principles to assist organisations to mitigate these risks. As global organisations, they are exposed to high-risk scenarios ranging from controllable risks – such as raw material price fluctuations, currency fluctuation, market changes and volatility in the fuel price – to uncontrollable ones such as natural disasters.

Only 40 percent of organisations are classified as having mature processes in that they invest in developing risk reduction capabilities.

"The survey shows that supply chain disruptions have a significant effect on company business and financial performance, and companies that invest in supply chain flexibility are more resilient to disruption than mature companies that don't."

The 'capability maturity' of an organisation was determined by using a supply chain and risk management capability maturity framework. This framework assesses the degree to which companies are applying the most effective enablers of supply chain risk reduction (e.g. flexibility, risk governance, integration, information sharing, data models and analytics and rationalisation) and their associated processes. The model depicts where a company is positioned relative to its competition and industry.

Turning to South Africa, recent research carried out by PwC indicates that fears about supply chain disruption among our CEOs have grown with a third expressing concern about this risk. Overall, South African CEOs are reluctant to abandon cost-cutting initiatives until the economy is stabilised. Businesses are looking for opportunities for innovation in their operating and business models to offer consumers more and at a lower cost. Looking back over the past year, cost reduction initiatives have remained the most prominent restructuring activity in corporate South Africa. "CEOs are striving to make their operations lean and efficient and it does not seem likely that cost reduction will drop down the agenda any time soon. However this needs to be balanced with the requirement for profitable growth which has direct implications for their supply chains."

He says that Africa has many exciting opportunities in terms of investment and trade but undeveloped logistics infrastructure and under capacitated utility providers create risks for reliable and cost effective supply chains and the ability to deliver on customer expectations. In order for South African businesses to benefit from growth in Africa, they must beneficiate and distribute raw materials and finished products across a much broader and complex supply chain network.

This means they need to know where to play in their industry value chains, consider new business processes and operating models, form new partnerships and leverage from existing ones, as well as embrace digital platforms to build supplier and customer channels. This also means considering the legislation and rules of operating across multiple jurisdictions.

Over the past three years the size of the supply chain network has increased, dependencies between entities and between functions have shifted, the speed of change has accelerated and the level of transparency has decreased. Overall, developing a product and getting it to market requires more complex supply chains needing a higher degree of coordination.

The risks to global supply chains tend to vary, with organisations citing fluctuations in raw material prices (53%), fluctuations in currency (47%) and market changes (41%) as the top three risks. Respondents said their supply chain operations were most sensitive to reliance on skill-set and expertise (31%), price of commodities (29%) and energy and oil (28%). A significant percentage of respondents (82%) said they had a business continuity plan ready to reduce the exposure of their supply chain to potential disruptions or to mitigate the impact.

Cawood says: "Supply chain operations and risk management processes go hand-in hand and complement one another. At lower maturity levels the processes are decoupled and stand-alone, but at high maturity levels they are fully integrated.

Flexibility is crucial to a company's ability to adapt to change. "A greater degree of anticipation, scenario planning and agility in their businesses will allow companies to better respond to demand changes, labour strikes, changes in technology, currency volatility and fluctuations in fuel and oil prices."

Cawood concludes: "Managing supply chain risk is critical for all parts of the business – product, design, development, operations, people and customers. Healthier and safer supply chains are vital for business continuity now and will pay off as a strategic competitive advantage when the economy recovers."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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