Supply Chain Security Risks and Outsourcing

At the outset I would like to clarify that this article is not going to deal with outsourcing risks.  The focus is on Supply Chain risks in an outsourced environment.  Risk in managing supply chains is high due to several reasons such as Terrorism, Shrinkage, Quality, Natural disasters, IP Thefts, and Vandalism etc.  The risk magnifies if the some or total operations are outsourced. Twenty five percent CAPGEMINI 2010 outsourcing survey participants have indicated that loss of control as one of the reasons for not outsourcing.

In order to outsource and to mitigate the supply chain risks collaboration becomes very critical in an outsourced environment.  According to CAPGEMINI 2007 report practitioners reveal a gap between the desire to work collaboratively with 3PLs and how to go about it. Collaboration means equal participation whereas 35% of the CAPGEMINI 2005 survey participants have indicated that the time and effort spent on managing Logistics functions not reduced.  This could mean practitioners believe that outsourcing means total responsibility transfer to 3PLs and no participation or minimal participation from their side.  Outsourcing means handing over the control over operations to a third party but the ownership rests with the outsourcing companies and they cannot disown the responsibility. One should clearly understand that the outsourcing is confined to activity but not the function.  The functional responsibility rests with the outsourcing company and they may have to execute the activity in collaboration with the service provider.

Time and again shippers (outsourcing companies) repeatedly pointed out that 3PL (third party logistics) companies do not have the project management capabilities and they fail during the transition due to lack of industry specific knowledge and also due to lack of process integration capability across supply chain. These teething issues if not addressed properly could lead to relationship failures.  Hence, the problem is not supply chain risks but the lack of collaboration in tackling the issues.  In order to highlight the seriousness of the issue, I reviewed the last five CAPGEMINI outsourcing surveys and the trend indicates consistency.

In my opinion, top three reasons that could lead to supply chain risks in an outsourced environment would be lack of project management skills, unsatisfactory transition and lack of knowledge based skills.  Surprisingly the feedback over the last five years was consistent and we see 20% improvement in case of knowledge based skills.  This could be due to more skilled force joining 3PL companies and we have seen recently 3PL companies recruiting practitioners as subject matter experts and to manage the projects.  What is disturbing is that on an average 15% survey respondents have indicated that 3PLs are unable to form meaningful and trusting relationships.  In my opinion this is a cause of concern.  The recent survey conducted by CAPGEMINI (2009) indicated that only 25% of the shippers felt that the outsourcing is “extremely successful” and further 64% participants felt that outsourcing is “somewhat successful”.   If the outsourcing community is not totally happy with the outsourcing outcomes or performance, managing risks through collaboration could become a serious issue.

How secure are the shippers about the security provided by 3PL companies?

The 2008 CAPGEMINI survey did indicate that majority of the respondents are comfortable with the security arrangements.  Around 22% have indicated somewhat secure and 2% indicated that not secure.  Supply Chain security is paramount and even if 2% were unhappy, it needs immediate attention.  These risks could lead to major customer satisfaction issues.  That could be the reason why 25% non-outsourcing respondents (2009 survey) indicated that they do not outsource due to loss of control over operations.  Some of the serious security breaches indicated in the 2008 survey included the following:

1. In one case, 2GB branded USB sticks were replaced with 1GB but appeared as 2GB to users.
2. Another case involved falsified Italian airplane parts that were later rumoured to have contributed to accidents.

Supply Chain security is critical to all industries but it is vital for some specific industries where any security breach could be life and death question and the example could be food contamination.  58% Food and beverages industry respondents in 2008 survey indicated that spoilage of food products creating a health risk as the biggest risk. The above mentioned survey did indicate that 3% Food and Beverage industry respondents were not secure about the arrangement, which is really a cause of concern.  Tampering was reported as the second biggest threat (45%) for life sciences and pharmaceutical companies.  This is also a life threatening risk.

Type of Supply Chain Risks:

One can divide the risks into two categories, the first one dealing with 3PL operational efficiency related risks and the second one dealing with generic supply chain risks. The trends reveal some interesting facts.

The top three risks, theft of material, material tampering and theft intellectual capital were predominant in Asia compared to global trends.  The risk of terrorist attacks and the disruptions due to natural disasters are the two top risks in North America.  Whereas Latin America faces serious supply chain risks from, smuggling of other material with the shipments, Vandalism and Spoilage of food products leading to health risks.  Europe is a mixed bag, it also faces all risks but the thefts and thefts of Intellectual capital are over and above the average global percentage.

The first three supply chain risks identified as 3PL operational efficiency related risks are quite common even in insourced operations.  As warehousing and distribution function is a non-core activity for many organizations, organizations should work in collaboration with the service provider to minimize the risks and operational disruptions.

Enhance Supply Chain Security:

Risks are inevitable and outsourcing is unavoidable (encouraged due to various benefits of outsourcing).  Hence, it is necessary to enhance the supply chain security with the help of service providers.  CAPGEMINI 2008 survey identified 12 enhancements and the participants have identified gaps in enhancing the security.  The below given chart is developed based on the data published in the above mentioned survey:

If we review top three gaps, any one would understand that it is not a challenging task to improve security.  What is lacking is proactive approach from both the shipper and the service provider.  Lack of proactive reporting with regard to thefts or any other risks is the biggest complaint by the outsourcing community and this continues to haunt the 3PL industry even today.  In most of the cases, the customer (shipper) gets to know first about the incident.  This is really frustrating for the practitioners.

RFID tags are virtually impossible to copy, making them suitable to security applications. According to “The pros and cons of RFID in supply chain management” article the cost of goods lost within supply chains among the European companies was 50 Million euros a day and the same report indicated that up to US$30 billion worth of goods are being lost each year within supply chain.  However, recent development are encouraging, one of the biggest retailer (Wal-Mart) introduced mandates for RFID adoption.

Providing alternative routing for shipments is a possibility.  However, in the peak seasons such as Christmas and Chinese New Year time it would be next to impossible for rerouting keeping in view of very limited options.

Collaboration:

Collaboration is all about working together.  The CAPGEMINI 2008 survey published how the shipper and service provider are collaborating by industry.  What is heartening to note is that 48% shippers are willing to collaborate with the service provider to enhance the supply chain security to a limited extent.  Retail dominates this segment (57%), followed by Life Science (51%) and Chemical (50%).  Thefts are very high in retail whether the operations are outsourced or insourced and life science and chemical industries face more risks if they fail to collaborate with the service providers to achieve selected security improvements.  The 2008 CAPGEMINI report indicates that the higher the company’s revenue, the more likely they are collaborating beef up security measures.

Supply chain efficiency is the back bone of organizational excellence.  According to one estimate supply chain disruptions could result in 40 percent decline in share price.  Prof. Vinod Singhal of DuPree College of Management, Georgia Institute of Technology indicated that material shortages could contribute 7.5% reduction in share value on a given day.

Today’s business success to great extent depends on logistics and supply chain performance and the role of Supply chain has never been as critical as it is today. Supply Chain speed and flexibility have become two key levers for competitive differentiation and increased profitability. In order to compete effectively in the market place Supply Chain managers drive cost improvements and that could lead to some supply chain risks.

“Many of the key risk factors have developed from a pressure to enhance productivity, eliminate waste, remove supply chain duplication, and drive for cost improvement,” says William L. Michels, CEO of consulting firm ADR North America, Ann Arbor, Mich.

Today’s supply chain professionals recognize the risk as part and parcel of supply chain management and at the same time outsourcing is also inevitable.  Hence, the trick lies in identifying the risk and mitigating the same with the help of supply chain partner.  Proactive approach and collaboration minimizes the risk element in Supply Chain.