271

Risks in 14
global supply
chains

C hapter learning objectives

This chapter will provide the reader with:

●● An explanation of the changing balance between external and

internal supply chain risks and how this has changed over the
past decades
●● A categorization of threats into those emanating from
environmental, geopolitical, technological and economic sources
●● An analysis and comparison of the resilience of vertical sector
supply chains
●● Case studies of some of the most important events to have
impacted upon supply chains and their implications
●● Insight into best practice and how supply chains can be made
more resilient to external threats

Rebalancing ‘external’ and ‘internal’ risks

External threats to supply chains have received considerable attention
following the well-publicized natural disasters in Japan and Thailand in 2011.
However, understanding of these risks is at a very early stage. One survey,
undertaken for the World Economic Forum, found that 30 per cent of
respondents estimated losses of 5 per cent of annual revenue from supply
chain disruption. However, more than a quarter of respondents were not
able to place a figure on the financial impact of a disruption (WEF, 2013).
272 Introduction to Global Logistics

It is not that the risks themselves have become more acute. After all, there
have always been wars and natural disasters. Rather it is the evolving supply
chain and production strategies of the major global manufacturers that have
changed, leading to a rebalancing of the risks inherent within various parts
of the supply chain.
One distinction that can be made is between ‘internal’ and ‘external’
risks. For example, in the 1980s the personal computer sector adopted
traditional manufacturing practices involving the outlay of huge amounts
of capital.
The risks were clear as many of these companies quickly went out of
business when their forecasts proved hopelessly wrong. From this period
new business models were developed, which allowed manufacturers to focus
on design and marketing and let their supplier bear the risk of production.
This process has been referred to as ‘un-bundling’ of production. In other
words, in this example, ‘internal’ risks were out-sourced to contract elec-
tronic manufacturers. This, however, did not leave the OEMs risk free –
rather the ‘internal’ risks were transformed into ‘external’, that is those that
are inherent in extended supply chains. The risks have changed but are still
there and are just as business critical.
The ‘un-bundling’ of various production processes has led many OEMs
to evolve into what are, in effect, managers of integrated and complex net-
works of remote but interlinked suppliers. In some cases this has produced
greater levels of risk, and in others it has had the opposite effect. There is no
doubt that extended supply chains are more vulnerable to external threats,
but on the other hand, such networks have also dispersed risks to a number
of markets by reducing centralization.
A small supply chain, for instance, with a single production facility is
highly vulnerable to external events, whereas a large, complex supply chain
with multiple supplier options has the potential to be much more robust
through a greater number of sourcing options. Each option may have higher
supply chain risk attached, although the probability of overall network dis-
ruption is less than in a small supply chain (see Figure 14.1).
The move towards more complex supply chains has its own risks,
related to a reduction of visibility and the development of suboptimal net-
works. With Asia transforming from a production market to a consumer-led
economy, this will only add extra layers of complexity into sourcing and
out-sourcing decisions for Western manufacturers. Timeliness, reliability,
information sharing, quality and design, along with wider benefits resulting
from shared labour skills and knowledge all need to be weighed along with
levels of visibility, management control and, of course, external risk.
 Risks in Global Supply Chains 273

Figure 14.1 Global supply chain risk – probability of disruption

A B
Supplier Disruptive Supplier
X event

Production
node

E C
Supplier Supplier

D
Supplier

Higher probability of ‘some’ disruption.

Lower probability of ‘total’ disruption.

Disruptive
event
A
Supplier
X B
Supplier
C
Supplier
Production
node

Lower probability of ‘some’ disruption.

Higher probability of ‘total’ disruption.

Globalization has also brought risks. Extended supply chains mean longer
lead times (and less agile response to market conditions); more handoffs
between parties; more challenging quality control as well as exposure to
currency fluctuations, labour disputes, shipping costs, corruption, theft and
natural/geopolitical instability. An understanding of this has led to many
manufacturers adopting a hybrid strategy of remote production combined
with near-sourcing.
274 Introduction to Global Logistics

The cost of transport (on which globalization is predicated) is also

overlooked as a major risk. This not only includes shipping rates, which
have been volatile over the past few years (in early 2012 shipping rates per
TEU rose by US $1,000 overnight on Asia–Europe tradelanes) but also cost
of fuel.

C ase S t u dy ASOS warehouse disaster shows hidden costs of

supply chain risk

A fire that occurred in June 2014 at the global distribution centre of online retailer,
ASOS, highlighted many of the risks to which modern supply chains are exposed.
The global retailer kept 70 per cent of its stock at its distribution centre in Barnsley,
UK, and it is believed that the fire affected more than £30 million (US $50 million) of
inventory. The facility was more than 600,000 square feet (60,000 square metres)
and the fire spread to four floors.
ASOS’s operation was disrupted for a weekend with the retailer suspending
orders over its website, although these recommenced early the next week. The
retailer’s share price fell by 2 per cent.
One of the problems of operating global distribution centres is the concentration
of risk in one location. Centralization of logistics operations makes sense on an
operational basis in terms of keeping stock levels low and reducing redundancy.
However, if external risks such as fires, floods and security issues are costed in,
then suddenly this approach can appear flawed. Although ASOS had insurance
and the disaster could have been a lot worse, there were still implications for the
retailer in terms of customer service and reputation.
To get back up and running so quickly, ASOS obviously had good contingency
plans in place, no doubt helped by an earlier experience when its previous
distribution centre in the UK was badly damaged by an oil depot blast. However,
this further disaster demonstrates the systemic fragility of many global supply
chains and perhaps suggests that it would be sensible to spread risk over a
number of locations, despite an increase in internal supply chain costs.
 Risks in Global Supply Chains 275

Quantifying supply chain risk

Manufacturers usually adopt one of three strategies when dealing with risk:

1 Inventory management – build up buffer stock.

2 Sourcing – developing contingency strategies for specific suppliers or
supply chain links.
3 ‘Acceptance’ – doing nothing as costs of mitigation outweigh benefits.

Deciding on which strategy to adopt relies on understanding the cost impli-

cations of each approach.
One pharmaceutical company undertook a cost-benefit approach to
working out how it should mitigate supply chain risk. They used insurance
and industry data to estimate the frequency and duration of disruptions,
and using scenario planning software they worked out how many weeks a
year their production would potentially be affected. They were then able to
set inventory holdings at a level that would minimize disruption. Of course,
the weakness of this approach was that, although it minimized disruption,
the strategy imposed huge additional costs on the organization, not only
from the financing of the additional inventory, but also from the risks of
redundancy of stock.
Modelling exercises also need to take into account the length of disrup-
tion as well as the probability. There are other variables: for example, the
length of time it takes for alternative suppliers to ramp up production. One
other interesting factor that impacts significantly on the extent of disruption
is the location of the event within the supply chain. The further upstream
it occurs, the longer the disruption to supply. The reason for this is that
downstream processing locations act as bottlenecks and take time to fulfil
back-orders once upstream supply is switched back on.
In many respects, effective supply chain management is all about the
trade-off of one set of risks against another. Keeping higher amounts of
stock in various locations is not necessarily a good response to the threat of
disruption as this is not only costly, but in high-tech sectors, for example,
where product lifecycles are low, would be business critical.
Lean supply chains are also a double-edged sword. Whilst they are work-
ing efficiently they have the potential to reduce inventory levels at the same
time as maintaining/improving customer service. However, there is no doubt
that they are less resilient to external shocks, as they do not provide a safety
net when supply chains break down.
276 Introduction to Global Logistics

In effect, what has happened in the past is that inventory levels have been
used as ‘insurance’ against risk. If there have been disruptions to supply or
to transportation, ‘buffer’ stock has allowed production or sales to continue
unaffected. Insurance companies that are now entering the supply chain risk
market are allowing manufacturers to out-source this risk, whilst keeping
inventory levels to a minimum. Quantifying the risk for insurance companies
(as well as manufacturers) is a major challenge.

Types of supply chain threat

When people talk about supply chain risk, they usually mean ‘external’
threats. As we have discussed, though, the relationship between external and
internal risk is very close. For example, increasing inventory levels increases
‘internal’ risks (redundancy, wastage, financing, etc) but mitigates external
risks (the impact of a disruptive event on supply).
The reverse is also true; reducing ‘internal’ risks can increase ‘external’
risks. For example, the problems that Toyota faced in the United States
relating to a malfunctioning brake pedal design were blamed on a supplier.
One estimate put the total costs of this supply chain catastrophe to Toyota
at US $2 billion, not including lost consumer confidence. With 60–70 per cent
of a vehicle manufacturer’s inventory managed by the supply chain, quality
control is obviously a huge issue.

Table 14.1 Global supply chain risk – Supply chain internal and external
characteristics

Supply chain characteristic Internal risk External risk

High stock levels High Low

Lean supply chains Low High

‘Bundled’ in-house production High Low

‘Un-bundled’ out-sourced production Low High

Globalized sourcing Low High

This perhaps can be seen as the inevitable consequence of a trade-off

between these different types of risk. However, one piece of research suggests
that when out-sourcing production (and risk), only 10 per cent of manufac-
turers undertake any sort of risk assessment.
 Risks in Global Supply Chains 277

Where external events have had most impact, this has been due to
insufficient risk assessment. One such example was the floods in Thailand.
Here the risk of centralization (which can occur in any geography) was
transplanted to a remote region where risk was not fully understood.
The high-tech manufacturing cluster that developed in Thailand had com-
parative advantage in terms of leveraging a local production ecosystem
whilst offering low-cost labour. The fact that this cluster developed in a
region of South East Asia was not the problem; rather that a consolidation
of specific competences had been allowed to develop in an exposed, flood-
prone location.
External threats to supply chains can be divided into four main categories:

Environmental
These include a wide range of events including extreme weather, earth-
quakes, tsunamis, floods and even volcanic eruptions. The economic cost
of natural disasters was estimated by insurance company Swiss Re at
US $194 billion in 2010. The supply chain consequences are derived from
not only the disruption of production but also the impact on transportation
services and infrastructure. A WEF/Accenture study found that following
the Japanese tsunami/earthquake the operating profits of 15 leading multi-
nationals fell by 33 per cent in the subsequent financial quarter directly as a
result of supply chain disruption.

Geopolitical
Tensions in the Middle East are a considerable source of risk for supply
chains, especially affecting transit routes such as the Straits of Hormuz and
the Suez Canal.
Terrorism also falls into this category, the most obvious example being
the events of 11 September 2001 in New York. A more recent example,
described below, relates to the bombs placed in packages originating from
Yemen. It should be noted that as regulators seek to limit the impact of
a terrorist event, they risk increasing supply chain costs by high levels of
security-driven regulations and procedures.
Piracy has also been a major issue for some supply chains. Millions of
dollars have been paid to pirates off the Somali coast and shipping lines
have been forced to divert to longer routes to avoid the problem areas.
Other costs include increased insurance; security and guards; increased
steaming speeds; higher wages for seamen (danger money) not to mention
indirect payments for military operations.
278 Introduction to Global Logistics

Economic
One of the most pressing supply chain risks from an economic perspective
is what can be termed ‘demand shocks’. An example of this is the disruption
caused by the company failure of suppliers following the 2008 recession.
This was particularly relevant to the high-tech and automotive sectors where
supplier bankruptcy was prevalent. Many of the problems were caused by
manufacturers ‘switching off’ supply from remote suppliers, and although
this had a short-term positive effect on inventories and balances, it meant
that when demand picked up strongly in 2010, manufacturers were unable
to meet demand.
‘Supply shocks’ are less obvious, but a material threat all the same. The
volatile nature of shipping rates could fall into this category. In early 2012,
shipping rates on Asia–Europe routes increased by about US $1,000 per
TEU (from about $650 to $1,650) – a situation that most shippers would
find difficult if not impossible to predict.
Manufacturers are ever more exposed to currency risks given the
globalized nature of their suppliers and customers. Given the eurozone
debt-crisis and the impact this has had on the strength of the euro against
the dollar, this risk is likely to have significant financial impact in the coming
years.

Technological
Technology failure/outage is a major concern to shippers, although as yet
there have been few significant incidents. A lot of money has been spent
by agencies, such as the Pentagon, in assessing and planning for a ‘cyber
terrorist’ attack, although minor disruption to date has come from power
failures or accidents. More reliance in the future will be placed on informa-
tion and communications networks as the supply chain industry becomes
increasingly paperless and this will only heighten the risks. However, actu-
ally measuring the true nature of the threat and robustness of information
systems is difficult.

Even localized events can have a major impact on global supply chains (see
Figure 14.2). For example, an earthquake such as the one in Japan in 2011
may be very localized in geographic terms, but has worldwide implications
for supply chains that depend on a large number of suppliers clustered in the
affected area.
Shipping rates, in contrast, are a global phenomenon. They affect all
supply chains, but although serious, have less of a catastrophic impact.
 Risks in Global Supply Chains 279

Figure 14.2 G
 lobal supply chain risk – external event impact on supply chain
(illustrative matrix)

Global X Fuel costs X Shipping rates X Geopolitical conflict

X Technology outage
X Quality control

Regional X Corruption X Piracy X Volcano

X Currency rates
X Earthquake
X Labour disputes
X Weather/floods
X Terrorism
X Supplier bankruptcy
Local

Low Potential Impact High

A geopolitical conflict, depending on where it takes place, could have a very

serious, disruptive impact at a global level. A supplier bankruptcy, on the
other hand, may be a local problem, and if contingency plans are in place,
may not be serious.
Of course, the seriousness of each of these threats is very specific to each
supply chain as well as the level of disruptiveness of the event in question.

Unknown unknowns…
The most disruptive supply chain events are those which have not or cannot
be planned for. Therefore, it is perhaps more useful, rather than look at past
events in order to gain some insight into the future, to identify weaknesses
in supply chains instead. Addressing vulnerability is the best way to mitigate
the impact of a disruption, although there still remains the issue of how
much time and money should be invested on each perceived weakness.
The World Economic Forum’s Supply Chain and Transport Risk Survey
2011 identified the least effectively managed supply chain components as
rated by respondents. The top five are:
280 Introduction to Global Logistics

1 Reliance on oil
2 Shared information
3 Fragmentation along the value chain
4 Extensive subcontracting
5 Supplier visibility

As the survey analysis points out, three of these components relate to visibil-
ity and control. Improvements in technology can mitigate this type of risk.
For example:

●● Development of supplier/buyer communities and the use of social media

technologies within supply chain communities could be one way in which
risks can be reduced.
●● ‘Sense and respond’ technologies allow for greater awareness of the
location of products in the supply chain, and hence enabling better
decision making/rerouting.

The development of information technologies will play an important role

in the mitigation of supply chain threats. There is little prospect that these
risks will diminish – some may even increase. Therefore, the ability to react
to events will become the key competitive differentiator, and technologies
that enable an enhanced level of supply chain agility will become highly
sought after.
However, the adoption of more technology will also play a role in
increasing risks. Increasing reliance on technology will leave supply chains
open to ‘cyber attacks’ or even accidental outages. Whilst technology will
lead to greater levels of efficiency, it will also mean that maintaining robust
networks will be ever more critical.
Despite this it is the industry’s reliance on oil that is of primary concern.
Given the relationship between geopolitical tension, the global economy
and the price of oil and the extreme volatility that this causes, it is clear that
alternative strategies must be developed. This could entail a rebalancing of
the inventory/transportation equation as shippers position stock in closer
proximity to end users. This will increase stock levels, but reduce transport
costs. Of course, as mentioned above, this has risks in its own right and
these need to be taken into account in a holistic supply chain management
strategy. It could also entail a move from global supply chains to near-sourcing
of products, especially utilizing less fuel-intensive modes of transport.
 Risks in Global Supply Chains 281

Sector resilience to threats

The characteristics of some supply chains make them more vulnerable
to supply chain threats than others. Figure 14.3 illustrates this point. The
high-tech sector, for example, relies heavily on global supply chains that are
typically high value, lean and un-bundled/out-sourced. The pharmaceutical
supply chain is much less globalized (although becoming more so), and
although there are intrinsic risks for the products themselves, the high level
of in-house production/distribution mitigates many of these risks. With
greater levels of out-sourcing in this sector, the external risks are set to rise.
Food supply chains tend to be local, characterized by low product value
and, in most cases, have low levels of risks attached. However, the horse-
meat scandal in Europe in 2013 showed very clearly, for processed foods at
least, that the sector was not immune to corruption and criminality involv-
ing wide-scale substitution. Food supply chains were shown to be complex
and lacking in transparency, which ultimately created issues of security and
process integrity.

Figure 14.3 Global supply chain risk – sector threat resilience

Global Fashion High-tech

Chemical

Auto
Regional FMCG

Pharma

Food

Local

Low External Risk High

282 Introduction to Global Logistics

Case studies: Supply chain disruption

Natural disasters
Japanese tsunami
The impact of Japan’s 2011 earthquake and tsunami on global supply chains
was dramatic with production across a whole range of sectors badly affected.
The Japanese electronics sector was amongst the hardest hit. Output
of NAND flash memory, on which new consumer electronic equipment
depends, was disrupted, albeit on a temporary basis. Many wafer fabrica-
tion plants, supplying the semiconductor industry, remained closed whilst
aftershocks continued to take place.
More surprising was the effects on other industries. The Japanese
automotive sector traditionally has a highly localized supply chain with
mechanical component manufacturers located next to major assembly
plants. Although these supplier parks were not affected, production was
halted all the same.
One reason why these automotive plants were hit is the increasing
number of electronic components in new motor vehicles. Already a huge
part of the value of new cars, electronic component sourcing differs from
that of mechanical parts. Increasingly the more complex assemblies are
sourced globally, with physically small yet important and expensive products
often moved by airfreight from distant production locations. This illustrates
an emerging trend in the automotive supply chain.
Plants beyond Japan suffered as well. For example, Toyota’s plant in the
UK shut down production due to uncertainties over component supply.
Renault’s Samsung plant in South Korea also slowed output due to problems
accessing its supply chain, part of which it shares with Nissan.
In fact, supply chains in the electronics sector, heavily dependent on
Japanese production, were affected right across Asia. There were reports
of key electronic components being in short supply as leading electronic
manufacturers such as Sony, Sharp and Panasonic shut plants.
Japan has a large chemical sector much of which is located on the coast.
Many of these facilities were damaged, with Dow Chemical reporting one of
its facilities flooded.
However, things could have been worse. More widespread disruption
was prevented by global supplies of flash memory on hand having built
up over the previous two months. Manufacturers were also able to shift
production from Japan to facilities outside the country.
 Risks in Global Supply Chains 283

It is believed as a result of the tsunami that manufacturers increased

orders to buffer against future supply chain disruptions. Higher inventory
could become the ‘new normal’ in the future, a calculated measure deployed
to mitigate the disrupting effects of natural disasters.

Thailand floods
In 2011, Thailand suffered one of the worst floods in five decades. The
floods began in July, but steadily worsened throughout October, and were
mainly limited to northern and eastern areas around Bangkok. However,
these affected areas were home to hundreds of manufacturing facilities that
were completely flooded. The automotive and hard disk drive manufacturing
industries were amongst the hardest affected.
Japanese car makers that had just started to recover from the earthquake
and tsunami now faced shortages of key parts made in Thailand. Toyota
and Honda both had to halt production at facilities even in North America
because their Thai suppliers were flooded.
The hard disk drive manufacturing sector was particularly affected.
Thailand is the second largest country for production of hard disk drives
after China. Toshiba, the fourth largest producer of hard disk drives halted
all of its production in Thailand; however, Seagate, the second largest
producer of hard disk drives, did not have to stop production because its
factories were in the north-east where flooding was less severe. Shortages
of supplies lasted into the first quarter of 2012. Prices increased 20–40 per
cent.
Subsequently, semiconductor chip manufacturer, Intel, warned that its
revenues and profits would be lower than expected due to shortages of hard
disk drives in the industry. Owing to the closures, Intel’s customers were
not able to source sufficient volumes of hard disk drives to meet demand,
and cut down on their microprocessor inventories. Intel warned that the
shortages would continue into the first quarter of 2012.
Intel was not the only manufacturer struggling. Dell also missed sales
targets in its quarterly results due, in part, to shortages of hard disk drives.
However, management said that it had made strategic purchases of inven-
tory elsewhere in an attempt to overcome this problem. This inevitably came
at a cost.
Thailand supplies about 40 per cent of the world’s market of hard disk
drives. The supply chain problems that high-tech manufacturers were facing
reopened the debate over the wisdom of sourcing from suppliers clustered in
such a vulnerable area.
284 Introduction to Global Logistics

Icelandic volcanos
The eruption on 14 April 2010 of Iceland’s Eyjafjallajokull volcano (the
second eruption in a month) caused havoc throughout Europe and beyond.
The impact of this first eruption in 190 years continued even after airspace
restrictions were lifted.
The regulators’ decision to shut down airspace in Britain, Norway,
the Netherlands, Germany, Austria, Belgium, Denmark, Finland, France,
Germany, Latvia, Luxembourg, Poland, Slovakia, the Czech Republic,
Bulgaria, Sweden and Switzerland cost airlines some US $200 million per
day from cancelled flights and caused the European economy to suffer
massive losses in lost business.
The obvious reaction by logistics planners was to use other modes of
transport for intra-European movements. The main problem was handling
intercontinental traffic. As a contingency, freight forwarders and airlines set
up hub activities in airports in southern Europe. For example UPS flew some
freight to Istanbul and moved it into Europe by road. Other providers used
North African or even Middle Eastern airports.
The supply chain consequences were felt further afield than in Europe,
and no more acutely than in East African markets. Here perishable air cargo,
such as fresh fruit and flowers, backed up at airports and, given the lack of
appropriate temperature-controlled storage facilities, much of it was ruined.
This caused considerable hardship to exporters and their employees.

Conflict and political unrest

The Middle East
The security situation in the Middle East has huge implications for the rest
of the world both politically and economically. Nowhere is this more evident
than in Egypt, which is transited by the Suez Canal, a route of strategic
importance for goods moving between Asia and Europe. The canal handles
about 8–10 per cent of the world’s trade and it is transited by more than
17,000 ships a year.
The volatile political situation in Egypt, first with the overthrow
of President Mubarak and then President Morsi, has therefore been of
immense concern to the shipping industry. Not least because, after the Straits
of Hormuz (also threatened earlier this decade by a breakdown of relations
with Iran), the canal is the second most important pinch point for oil and
liquefied gas heading from the Middle East to Europe and North America.
 Risks in Global Supply Chains 285

Any geopolitical or security event that resulted in the closure of the Suez
Canal would have major implications for shipping and world trade. It would
force ships bound to and from Asia to use the Cape of Good Hope in South
Africa instead, adding several days to the transit time. Whereas ships using the
Suez Canal only travel 12,000 kilometres from the Arabian Gulf to London,
those choosing the Cape of Good Hope would travel 20,900 kilometres. In
terms of days, such a transit would be 14 days compared with 24 days.
Going via the Cape would increase not only operational costs such as
fuel, chartering, crewing (impacting on rates charged to shippers), but also
add significantly to inventory costs as shippers would have to bear an
additional 10 days of capital.
Threats to the Suez Canal come from a number of sources:

●● civil war in Egypt;

●● local Islamic extremists;
●● international terrorist organizations such as so-called Islamic State;
●● a wider Middle Eastern conflict.

Each of these threats has a varying level of probability. The present poor
security situation in Egypt is perhaps the most pressing as the Suez Canal
would become a valuable strategic asset to both sides in a civil war. At
present the Egyptian military has provided sufficient security, ensuring that
operations were not affected even during the uprising against Mubarak.
However, the latest conflict between the Muslim Brotherhood and the
Egyptian army risks becoming far more serious to the long-term stability
of the country. Providing US $5.1 billion in revenue from tolls, there is an
obvious interest to all sides to keep the canal open. However, it could also
be used as a bargaining chip in any political manoeuvring that may occur.
In September 2013, three men launched an attack with guns and a rocket-
propelled grenade on a Chinese vessel transiting the canal, the COSCO Asia.
Although the three men were quickly apprehended and little damage was
inflicted, the proximity of land to the ships makes them easy targets, and
highlights the need for strong security on either side of the canal.

Economic/demand shocks
Cisco’s troubles typify supply chain challenges
In June 2010, the Council of Supply Chain Management Professionals
(CSCMP) asserted that the sharp destocking experienced during the recession
286 Introduction to Global Logistics

had disrupted supply chains and that many organizations had to resort to
emergency measures to cope when demand picked up. This, according to the
Council, was behind much of the boom in airfreight seen in the previous few
quarters as manufacturers desperately sought to source components and
support increased production. What emerged were some examples of such
supply chain stress.
Take Cisco, a huge company built on the design of the hardware that
makes up the infrastructure of the internet. For much of 2010 Cisco was in
crisis due to the malfunctioning of its supply chain. Its customers complained
that the company could not deliver its products on time or, in some cases,
even deliver them at all. Engineers maintaining infrastructure such as data
centres were facing a wait of up to 12 weeks for basic switching components.
The origin of the problem clearly lay with Cisco’s suppliers, many of
them based in China. According to a statement from Cisco itself, the issues
were, ‘Attributable in part to increasing demand driven by the improvement
in our overall markets… the longer than normal lead time extensions also
stemmed from supplier constraints based upon their labour and other
actions taken during the global economic downturn’. In other words, com-
ponent suppliers laid off workers during the recession and reduced capacity.
Consequently, there was not enough production capacity to fulfil demand.
It was also very interesting to see the reaction of customers to the worsen-
ing supply situation. According to Cisco, this led customers, ‘… to place the
same order multiple times within our various sales channels and to cancel
the duplicative orders upon receipt of the product, or to place orders with
other vendors with shorter manufacturing lead times’.
In its statement Cisco said that, ‘Our efforts to improve manufacturing
lead-time performance may result in corresponding reductions in order
backlog. A decline in backlog levels could result in more variability and less
predictability in our quarter-to-quarter net sales and operating results’. This
might be taken as typical ‘squirreling’ behaviour where customers increase
inventory levels in an environment of uncertainty. The result is ‘lumpy’
demand, with wild swings between shortage and over-stocking.
The economic stress being visited upon supply chains led in turn to a
failure to manage inventory properly. This in turn affected the management
of transport. Or in the words of Cisco, ‘We have experienced periods of time
during which shipments have exceeded net bookings or manufacturing
issues have delayed shipments, leading to nonlinearity in shipping patterns.
In addition to making it difficult to predict revenue for a particular period,
nonlinearity in shipping can increase costs, because irregular shipment
 Risks in Global Supply Chains 287

patterns result in periods of underutilized capacity and periods in which

overtime expenses may be incurred, as well as in potential additional inven-
tory management-related costs.’
In other words, this statement meant Cisco, an erstwhile poster child of
supply chain excellence, faced immense challenges in its logistics.

Terrorism
Yemen-originated terrorism
The placing of a parcel bomb on a Qatar Airways plane between Sana’a,
Yemen, and Dubai as belly-hold freight amplified the issue of security for
the airfreight sector. Whilst it was disturbing that terrorists were able to
penetrate the networks of FedEx and UPS, the Qatar Airways incident
demonstrated that the whole of the airfreight industry is affected by the
problem.
Although freight industry organizations cautioned against an excessive
security clamp-down, politicians in Britain and the United States committed
to security reviews. This reaction by the authorities is likely to take the form
of more inspection and scanning, possibly leading to the wider use of ‘explo-
sive detection systems’. These are complex pieces of engineering that are
both slow and very expensive, but they do offer better performance against
nitrate-based explosive than x-ray systems.
In the latest cases the core problem is that the primary systems put in
place to prevent the loading of explosive devices failed. Both the surveillance
technology being used at present and the ‘Known Consignor’ system were
either deceived or by-passed. It is worth observing that it was the Express
providers who were targeted as these systems are possibly more open to
the general public and therefore may offer greater opportunity to hide the
identity of the person placing the package in the system.
The lesson that the incidents appear to give is that the nature of the threat
is dynamic rather than static. The individuals placing the bombs into the
freight systems designed the devices to deliberately evade the security sys-
tems. This displayed both a knowledge of the security systems used and the
ability to design a device capable of evading these systems. Therefore any
effective new security systems put in place by the air cargo sector is going to
have to be both proactive and continually adaptive.
In truth there is nothing particularly original about the approach taken in
the most recent devices. The bomb on Pam Am 103, which blew up over
Scotland in 1988, had strong similarities in design. However, the innovation
288 Introduction to Global Logistics

of disguising explosive as printer-toner illustrates an evolution in the nature

of the problem. The airfreight business systems must in turn evolve to
anticipate such developments. It must achieve this whilst not crippling the
operations of the business either in terms of time to scan each consignment
or cost. Either way the cost penalty of developing such a response quickly
and across the whole air cargo system is likely to be substantial.
The question is whether to approach the security with a risk-based
strategy that relies on characteristics of a shipment to identify packages for
increased scrutiny or one in which all shipments are subject to some form of
physical inspection.
Proponents of comprehensive physical screening argue that it is the only
way to ensure adequate security, whilst advocates of risk-based approaches
argue that comprehensive screening is too costly and too time consuming.
Costs of implementing 100 per cent screening is estimated to be more than
US $3.5 billion over a six-year period. Not only is this an expensive
approach but probably an inefficient one as shipping delays are likely to
occur with this method.
Under the current air cargo security system, a number of risk-based strat-
egies are being implemented and expanded to evaluate the security risk of
air cargo shipments. Existing programmes such as the Known Shipper
Program and the Certified Cargo Screening Program, both of which have
been in place for several years, are being studied for potential enhancements
and expansions.
Another measure that must be taken on is technology. The US
Transportation Security Administration (TSA) has approved a number of
x-ray, bulk explosives detection systems and explosives trace detection
machines for screening air cargo. However, these are variations of technolo-
gies used for screening checked baggage and carry-on items. Unfortunately,
none of these devices are capable of effectively screening palletized or
containerized cargo, which makes up 75 per cent of all cargo carried on
passenger planes. Instead, screening must be done on individual cargo items.
As a result, the TSA is studying various new technologies.
The US Department of Homeland Security and the TSA will also need
to monitor and provide a solution for international air cargo entering
the United States. Most of the focus has been on air cargo screening of
out-bound domestic US cargo. Although the TSA lacks the direct authority
to dictate screening requirements at foreign airports for US-bound cargo,
it could potentially impose regulations on foreign carriers, as well as US
 Risks in Global Supply Chains 289

carriers. However, enforcement overseas would be up to authorities in other

countries. If they do not concur with the US approach, disagreement over
security standards could complicate US foreign relations and could poten-
tially impact foreign trade.

Conclusion
Although global supply chains have created mutual benefits for developed
and emerging markets alike, these same supply chains have increased risk to
the global economy. Reliance on production in markets such as China and
the rest of Asia Pacific has put Western economies at the mercy of a series of
internal and external threats to its extended supply chains.
Production in remote locations has brought with it increased exposure
to environmental threats such as the tsunami in Japan and the floods in
Thailand, both of which have been important in raising the issue of supply
chain vulnerability. These events brought massive disruption to automotive
and high-tech supply chains, but both could have been much worse. The first
step for many manufacturers will be to accept that global supply chains
bring with them risk. However, once the threats have been identified, quan-
tifying them will be harder still.

Summary

Over the past three decades and more, manufacturers have sought to
take advantage of low-cost labour in developing countries and, at the
same time, reduce inventory levels. These strategies have been called
into question by catastrophic events such as the Japanese tsunami,
which resulted in major supply chain disruption. This chapter looked at
these risks in more detail and how many manufacturers have ignored them
in their rush to drive down costs. It reviewed the type of threats, ranging
from geopolitical to economic, and detailed some of the major disasters
that have occurred and their implications for supply chains.
290 Introduction to Global Logistics

Key points to consider:

●● When developing their supply chain strategies, manufacturers need

to take a holistic approach to costs – not just focused on inventory
or labour, but measuring the impact of disruption.
●● Many companies have adopted a ‘virtual manufacturing network’
approach – out-sourcing component supply to multiple and remotely
located suppliers. This has extended and complicated supply chains,
making them more vulnerable.
●● Transport bottlenecks – a ‘gateway’ port such as Rotterdam or the
Suez Canal, for instance – are at risk from terrorist attack or even just a
collision. The concentration of shipping at these points and the growth
in the size of container vessels is increasing these risks significantly.
●● Many manufacturers have very little visibility below Tier 1 or Tier 2
suppliers. This is a major problem if a supplier of a unique product
is disrupted.
●● Technology dependence means that manufacturers, retailers and
logistics providers are considerably at risk from cyber-attack or outage
of some sort. However, the supply chain visibility that technology
can provide, can also be used to mitigate the impact of disruption
by improving decision making.
 291

The 15
e-commerce
logistics
phenomenon

C hapter learning objectives

This chapter will provide the reader with:

●● A description of e-commerce and the impact of e-retailing upon

the logistics sector
●● An analysis of logistics segments related to e-commerce and how
they have developed to meet the evolving needs of customers and
parcel recipients
●● Innovations in alternative delivery locations such as lockers, click
and collect and parcels shop networks
●● An overview of the growth of two of the world’s fastest-growing
e-retailers, Amazon and Alibaba

One of the biggest trends to impact on the global logistics industry over the
past 10 years has been the emergence of e-commerce. Whilst the retail sector
in the developed world has stagnated due to the economic situation, e-retailers
have seen volumes grow significantly. The changing business model has meant
that whilst logistics and transport companies tied to traditional retailers
have struggled, those which have been able to embrace the new distribution
channels with a host of new services have prospered. Not least amongst these
have been the parcels companies responsible for last mile ‘B2C’ deliveries. The
phenomenon has also created a welcome new revenue stream for the post offices.