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Sustaining Global Supply Chains: Expecting the Unexpected

[004-0232]

Fiona Gorton, Manchester Business School: Manchester University

Dr David Bamford, Manchester Business School: Manchester University

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ABSTRACT This paper analyses how the increasing volatility of the global environment forces organisations to adopt an �expect the unexpected� approach to supply chain management. Globalisation has presented a new dimension of risk to supply chains and inter-country challenges of; political agendas, conflict and legislative requirements. Geopolitical threats such as; SARS, Avian Flu and the war in Iraq have all had direct or indirect impacts on organisation�s global supply chains. This article explores how organisations can remain competitive and meet consumer demand in a global market so threatened by uncertainty and states of hypercompetition. The author analyses the continuing relevance of traditional theories in terms of; strategic sourcing, value chains, just in time and inventory management. Case studies of organisation�s contingency planning models are given in order to present a toolkit of successful global supply chain practices to enable organisations to respond to and minimise the effects of new world uncertainties. INTRODUCTION TO GLOBALISATION AND GLOBAL SUPPLY CHAIN MANAGEMENT In order to set the context for this paper, it is important to define globalisation and the globalisation of supply chains. A definition by Musso (2006) describes globalisation as;

�Increasing integration of economies around the world, particularly through trade and financial flows� also refers to the movement of people (labour) and knowledge (technology) across international borders�

Cable (1999) additionally presents the idea of an all encompassing range of global supply chain activities including offshore and internal functions. Cable summarises that globalisation is a progression away from the domestic. Musso (2006) discusses the purpose of global production systems as being to enable organisations to respond to the competitive challenges of hyper competitive markets. The activities of global production systems include a complex variety of �intrafirm and interfirm arrangements� that take place within a variety of locations. Christopher (1992) presents the function of global supply chains as being the process by which organisations manage their customer and supplier relationships throughout the extended supply chain. The purpose of global supply chain management is therefore to create added value within and at the end of the supply chain but at a reduced cost to the supply chain as a whole. In addition to the incentives of the rewards an organisation can receive through globalisation, customers themselves are also increasing in their demands due to a greater awareness of increased diversity of products and price reductions that can be achieved by globalisation. In an interview, Niall Ferguson (2005) gives the first move to globalisation as being as early as 1866 when the first transatlantic cable was laid. Flurry�s article �Changing of the Guard� (2005: 23) identifies a number of political and historical events as contributors to globalisation. For example, removal of barriers at major ports and access points such as Suez, Singapore and Panama, have reduced the level of control that some countries had as gatekeepers to others. These events have supported free trade and globalisation but supply chain managers must be aware of the added political complexities of moving a supply chain into these regions. In a battle to reduce production costs and remain competitive in terms of the price of products for the end consumer, many organisations have moved production to those

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locations where it is cheapest to produce. Therefore, this internationalisation of supply chains and production and distribution locations is increasing levels of globalisation. For example, regulatory requirements surrounding the use of animal by-products, waste management and the EU water framework have made poultry production in the EU uncompetitive. This shift in poultry production to the Far East has increased the damaging impact of bird flu that has affected poultry production on a significant global scale (Howells and Wood, 1993). Flurry (2006: 29) estimates that reduced costs of production have caused around 700,000 US jobs to be outsourced to India along with many to China. Globalisation is an attractive prospect for many organisations. By internationalising their production and supply chain, an organisation can employ cheap labour and maximise profits. For example, organisations that shift their production to China can benefit from a workforce that is prepared to work seven days per week, will earn $0.50 to $1 per hour and will not receive benefits for social security, healthcare, holidays, pensions or employee safety (Flurry, 2006: 30). An important consideration in the �expect the unexpected� approach to supply chain management is the consequences of globalisation �moving up the value chain� (Flurry, 2006: 30). From an initial shift to move manufacture of toys and shoes to countries with low salaries, globalisation has since lead to the shift in production location of shipbuilding and primary metals. Flurry (2006: 30) proposes that in the future the supply chains for production of computer software and Hollywood animations could see an even greater bias to the East. Flurry (2006: 29) attributes this growth of globalisation and its effects on the US to;

1. 1994, North American Free Trade Agreement causing a shift in manufacturing (particularly automotives and television) to Mexico.

2. Continuous lessening of international trade barriers. 3. January 2006, Central America Free Trade Area expected to cause a large

shift in manufacturing locations for companies such as Dell, IBM and Sara Lee.

Musso (2006) gives the main drivers for globalisation as being the scope for growth of the organisation and the desire to stay ahead of the competition by maximising economies of scale and gaining market dominance. The varying levels of organisational strategy require differing responses to globalisation. These supply chain strategies can be explained in the following table, adapted from Musso (2006); Table 1 - Supply Chain Strategies

COMPANY STRATEGY FEATURES BMW International

Strategy ! Many countries ! Low product definition ! Large economies of scale ! Incentives for factories in many countries

Nestle Global Strategy ! Large economies of scale ! Different products, different countries ! Small factories to meet local need

CitiGroup Multi-Domestic Strategy

! Pressure for growth ! Local companies, local laws, local needs ! Value in capital, knowledge, affiliation

In reference to the above types of global strategy, Musso (2006) gives the associated supply chain concerns as being;

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Table 2 - Supply Chain Concerns SUPPLY CONCERN: FOR EXAMPLE ECONOMIC EFFICIENCY

Dell: worldwide outsourced parts, regional assembly.

Nike: global outsourced finished good manufacture.

LOCAL RESPONSIVENESS

Nestle: ingredients bought globally, products made locally to taste.

GM: regional manufacture and knowledge base.

INTERNATIONAL RELATIONS

Boeing: manufacture in the East, transfer of knowledge.

Defense: contracts with suppliers in allied countries to gain favour from government.

ECONOMIC EFFECTS OF GLOBALISATION The Toronto Star (1999) believes that globalisation has caused Europe to unite and so simplifying supply chains within the EU. The Toronto Star comments, �Europe: one market, one currency, one aim�. In addition to supply chain implications, there are also the associated alliances in terms of military aerospace and defense. Globalisation also has the consequences of shifting expertise and potentially wealth and intellectual property abroad. In the long term this could mean that countries who have been respected as world leaders such as the US and UK, see the migration of their technological skills, wealth and power (Flurry, 2006: 29). A great deal of globalisation can be attributed to the shift in manufacturing and technology production to China. In 2004, China�s technology sales rose to $180 billion dollars, bringing both economic and military implications (Flurry, 2006: 20). The shift towards China in terms of technology production has also caused a shift in terms of the skills and capabilities surrounding the production of these products and supporting research and development. The increase in the technological skill base of China means that its army is;

�moving very quickly to adopt practically every information-related aspect of military technology that the US is pursuing at this time�

(Fisher, 2005). The implications of the increasing technical expertise of China and its military are highlighted by Ferguson�s research. Flurry (2006: 20) further explores the consequences of China�s growth in technological ability and the impact this has on the UK. Flurry concludes that globalisation has enabled China to reposition itself as the focal point of the technology supply chain. Flurry (2006: 20) believes China is;

�raising the prospect of future US dependency on China for certain items critical to the US defense industry as well as vital to continued economic leadership�.

An emerging consequence of China�s stronghold in the global technology market has been the marginalisation of US technology manufacture (Flurry, 2006: 20). The effect of globalisation moving up the value chain could mean the need to reassess the consequences of the trade off between the flow of income capital out of a country versus the benefits of importing goods in at a lower price. For example, globalisation has caused the US manufacturing sector to be marginalized to a great extent. The manufacturing share of the US economy has fallen from 53 per cent in 1965, to 39 per cent in 1988 and 9 per cent in 2004 (Flurry, 2006: 28). The level of

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Americans employed in manufacturing has fallen from 25 per cent in 1970 to 10 per cent in 2005, although this figure is thought to be nearer 5 per cent (Flurry, 2006: 28). CONSEQUENCES OF GLOBALISATION Yam (2004) proposes that when economies engage in global trading, they consequentially observe significant benefits. These benefits include opportunities to specialise predominantly in the production of goods in which they have competitive advantage. An additional benefit is the maximisation of efficiency in international capital allocation. Taylor (2002) recognised the benefits that can be achieved from vertical supply chain integration in terms of �lower prices, high quality and more consistent quality�. However, Taylor (2002) also presents the risks of �vertical integration combined with horizontal consolidation� as this may cause an �imbalance of economic power� that is detrimental to both �consumers and producers�. Lynn (2005) notes that the streamlining of businesses that has occurred as a response to managing global supply chains has meant that the effect of a single event �reverberates worldwide�. An inherent factor of globalisation is the bringing together of people from many different nations. These people may have differing economic and financial priorities, local and national regulatory restrictions and other equally influential differences such as culture, religion and historical events. Yam (2004) also highlighted the varying elasticity of these preferences and the consequential intentional and unintentional inequalities and exploitation that result from globalisation. Yam (2004) suggests that these international inequalities resulting from globalisation are the cause of certain militant and terrorist attacks by various groups. As a consequence, many of the negative effects of globalisation stem from organisation�s failures to identify and manage the risks to their extended supply chain of operating within a global economic field. Flurry (2006: 28) believes that globalisation has caused countries to become �vulnerable� as a former bases for �strong domestic manufacturing� have now moved abroad. The biggest losses and associated vulnerabilities were found to be in automotives (Flurry, 2006: 28). General Motors (GM) has suffered at the hands of globalisation (GM, 2005). The pressures of globalisation have forced GM to �get its costs in line with global competitors�. In response, GM has cut 30,000 US jobs, closed nine US manufacturing plants and laid off 40 per cent of US white collar staff since 2000. As a result of globalisation and hypercompetitive markets, CNN (2005) reported that it is �inevitable� that GM will eventually seek bankruptcy protection. Delphi, an auto parts maker and former subsidiary of GM also suffered from exposure to hypercompetitive, globalised markets with a number of consequences (Flurry, 2006: 29). In 1999, Delphi laid off 18,000 US workers. In 2005 the company filed for bankruptcy. This year has seen Delphi seeking to cut two thirds of its US workforce and plan to slash average manufacturing wages from $30 per hour to $10 per hour. In 2005, the loss of 30,000 US jobs at Ford was reported along with the comment;

�this is the beginning of the end of the US auto industry as most people have come to know it.�

(Egan-Jones Ratings Co., 2005). Flurry (2006: 29) gives a number of other consequences of globalisation on the US;

1. 1950-2000, loss of 491,000 manufacturing jobs in primary metals. 2. 1998-2006, loss of three million manufacturing jobs since. 3. 2000-2003, loss of 149,000 manufacturing jobs in primary metals. 4. 2003, closure of industrial giant Bethlehem Steel. 5. 2004, Levi Strauss closed last 60 factories.

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Therefore, this work has to take place somewhere in the world so the loss of US jobs is increasing globalisation and the need for effective global supply chains. Hira and Hira (2005) additionally report that outsourced jobs are not confined to manufacturing and include white-collar work such as information technology, financial services and customer service. Although as discussed, the globalisation of supply chains may increase an organisation�s profitability, the loss of manufacturing jobs in the richer countries could have serious economic consequences and bring threat of recession. US workers who previously earned on average $51,000 per year in manufacturing, are now earning $17,000 in leisure and hospitality, $33,000 in healthcare and $39,000 in construction. In addition, the US is now importing twice the amount it exports, causing an annual trade deficit of $800 billion (Flurry, 2006). DEGLOBALISATION Ferguson (2005) identifies the principal event of deglobalisation as being the consequences of the 1914 world war. This event is a key example of the effect that power conflicts and political unrest can have in causing the decline of globalisation. Ferguson (2005) identifies the five key contributors to the future decline of globalisation. The first two are given as the United States and the United States� relationship with China. Ferguson presents the third as America�s perception of unreliability in Europe, and Japanese, South Korean and Taiwanese perceptions of unreliability of America. The fourth threat is given as Syria, Iran, and similar countries. The final threat is that of terrorist organisations such as Al Quaeda. The perceived threats to modern globalisation can be attributed to a number of causes. These may include;

1. Oklahoma City bombing (1995), (Saul, 2005). 2. Recession in Southeast Asia (1990�s), (Saul, 2005) 3. Debts and currency crisis in South America, (Saul, 2005). 4. Terrorist attacks of 9/11 (Saul, 2005). 5. Various food scares such as Foot and Mouth disease (2001). 6. UK fuel protests (2002).

Disasters such as these often cause unpredictable factors that effect global supply chains. These variables may cause magnified consequences that impact further along the supply chain and create Forrester�s bullwhip effect (Glossary of Manufacturing, 2006). The consequences may also increase total supply chain cost for the organisation and its customers and result in a reduced level of service (QuickMBA, 2006). Globalisation has also been a major factor in the growth of underground economies in terms of; arms trafficking, bootlegged CDs and DVDs and money laundering (Naim, 2005). Naim (2005) reports that there has been a doubling in legitimate global trading from $5 trillion in 1990 to $10 trillion at present. However, in the same period, money laundering has increased tenfold to $1 trillion, Naim attributes this increase largely to globalisation. Globalisation has opened the floodgates to illicit trade. The increase in illicit trade also means that it is more difficult to control and regulate global supply chains and much trade can take place undetected. This illicit trade is threatening the demand for legitimate goods as illicit products flood the market at a reduced cost to the consumer. Therefore, the growth in illicit trade is a threat to the continuity of legitimate supply chains and may become a contributor to deglobalisation.

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In addition, Yong Kim et al., (2000) report that although globalisation has caused an increase in the wealth of many countries, there has also been an increase in people living in extreme poverty thus causing greater inequality in the world. The fall in living standards in the poorer countries may also mean that their economies are becoming increasingly unstable. Trading with such unstable, unpredictable and potentially volatile economies presents additional risk factors to consider in terms of global supply chain management. Natural Disasters and Economic Crises The following table illustrates the effect that global crises have had on the supply chains of global organisations. Table 3 - Effect of Global Crises on Supply Chains ORGANISATION CRISIS EFFECT Daimler Chrysler Hurricane Floyd. Closure of production plant. Toyota Fire at supplier. Shut down of half of the assembly

lines for six weeks. Land Rover Supplier insolvent. Threat of production shut down. Nissan and Toyota Closure of 29 US ports. Threat of East Asian recession (Jennings, 2002. McGillivray, 2000. Nelson et al., 1998. Simpson, 2002.) Table 3 clearly illustrates the effect that natural and economic disasters can have on global organisations. Notably, the closure of a number of ports in the US enforced a bottleneck in the supply chain of cars and consequentially threatened recession in Asia. It must also be noted that these crises have had a substantial effect on the continuity of the organisations and economies involved, despite occurring at different stages within the supply chain: beginning, middle and end. Therefore, an effective supply chain risk management strategy must operate from a holistic perspective. Environmental Impacts on Global Supply Chains Kunstler (2005) explores the modern global economy�s extreme dependence on fossil fuels. Fossil fuels have allowed the cheap production of food, massive construction of infrastructure, advances in healthcare and the supply of goods on a global basis. When fossil fuels do eventually run out, Kunstler (2005) believes that alternative sources of fuel, although useful, cannot match the demand for fossil fuels. As fossil fuels gradually run out, the threat this places on global supply chains is increasing. Kunstler (2005) notes the fundamentality of the availability of fossil fuels to the functioning of our global economy in terms of the demand for oil and gas and the production of fertilisers, pesticides, plastics and pharmaceuticals. Kunstler (2005) reports that the impending expiration of fossil fuels will be the key factor in deglobalisation and will force individual economies to become re-localised. CONTINUITY OF KEY PRODUCTS AND SERVICES Disasters or potential disasters such as the Millennium Bug highlighted the need for businesses to develop continuity plans (Crossley, 2006: 38). These plans should provide a strategy that will allow organisations to continue to supply products to consumers in the event of a crisis.

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Huselid, Becker and Beatty (2005) put forward a workforce management strategy whereby organisations identify a set of �A Positions�. These are the organisational roles giving the greatest contribution to organisational success, therefore a Pareto Law-like concept. In a similar style, it would be beneficial for organisations to identify �A Products� for which it is priority to maintain supply in the event of a disaster. These products would therefore be the focus of an organisation�s supply chain continuity strategy. Examples of �A products� or services could include; Table 4 - �A� Products ORGANISATION EVENT �A� PRODUCT OR

SERVICE REASON FOR �A� STATUS

Hospital Unrest in petroleum exporting countries, restricting global fuel supply.

Delivery of blood for transfusion.

Failure could result in death.

Pharmaceutical company

Fire in factory. Production of AIDS drugs for global supply.

Maintenance of health of AIDS sufferers on a global scale.

THE GLOBAL FOOD SUPPLY CHAIN Consumers around the world have benefited from the globalisation of the food supply chain in terms of lower prices, greater choice and convenience food (Manning and Baines, 2004: 819). The Food and Agriculture Organisation (2003) defines globalisation as the;

�ongoing process of rapid global economic integration facilitated by lower transaction costs and lower barriers to movement in capital and goods�

However, the global food supply chain is extremely complex. Regulations for the supply of bananas and agriculture policies for beef have caused trade disputes between the US and Europe (Flurry, 2005: 23). Manning and Baines (2002: 826) give a definition of the benefits resulting from the globalisation of the food chain;

�Integration and the development of food-chain clusters deliver increased purchasing power and greater intellectual, technological and production resources for an organization to draw upon in order to provide products that meet differentiated customer needs�

In terms of the global food supply chain; there are numerous factors that affect its sustainability. Manning and Baines (2004: 819) identify some of these as being; strength of currencies, rate of technology transfer, tax and regulatory restrictions and the cost of capital and labour. Other pressures on the sustainability of globalisation include; differentiation between international and domestic food trades, concerns regarding differing production methods and hygiene, health and safety standards. To this list, we can also add international food crises such as; Mad Cow Disease, Foot and Mouth Disease, Avian Flu and a number of countries� attempts to boycott banana imports from the USA, amongst other threats on the global supply of food. Avian Flu The global supply of poultry is a significant case to examine due to its high profile nature and extensive potential consequences. The Food and Agriculture organisation (2003) predict the annual global supply of poultry to reach 143 million tonnes by 2030. Although it has only been in recent months that avian flu has been widely

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accepted as a major risk to the sustainability of worldwide poultry markets, it has been threatening globalisation of poultry supply chains since the 1960�s (Overby et al., 2005: 17). Research has suggested that an avian flu pandemic could infect 30 to 40 per cent of the population of which one third could die (Overby et al., 2005: 18). The effect of avian flu therefore could be to cause deglobalisation. A comparable crisis is mad cow disease that caused the export and import of meat to be banned to and from a number of countries. The Spanish Flu pandemic of 1918 illustrated the potential death toll from such a virus, this being more than the total US soldiers killed in World War One, World War Two, the Korean War and the Vietnam War combined (Overby et al., 2005: 18). As observed from the SARS virus outbreak, such viruses could travel around the world in as little as two weeks (Manning, 2003; Kaye, 2003). The case study of avian flu is used to illustrate the extended global impact of a single disaster. The globalisation of supply chains means the impact of infectious diseases is magnified due to increased levels of inter-country travel. The presence of bird flu in Taiwan (Overby et al., 2005: 20) is already threatening the tourism economy that was so devastated by the Tsunami of December 2004. Avian flu is spreading around the globe with great velocity and outbreaks have been confirmed in China, Japan, Korea and Cambodia, to mention a few. On 15th February 2006, avian flu was found in two wild swans in Germany (BBC News3, 2006), sending alarm bells around the European economy. On the 16th February 2006, cases of avian flu were detected in Slovenia and Hungary (BBC News4, 2006). BBC News1 confirmed an outbreak in France on 20th February. Approaches to global supply chain management in response to a disaster could be for example; strategies developed by organisations or governmental regulatory procedures. However, procedures set by governments or independent bodies may not always be as effective as they are set by people who may not have a great level of experience with the supply chain, product or organisation in question. To date, avian flu has not reached the UK although the UK government has developed two measures that will be taken should avian flu be detected (BBC News2, 2006);

1. One mile exclusion zone around the infected bird preventing the sale of poultry from this zone.

2. No movement of poultry within the one mile exclusion zone. The policies regarding the management of the UK poultry stock and its supply chain in response to a UK outbreak are somewhat confusing. The National Farmers Union (BBC News1, 2006) believes that it would be �a massive over-reaction� to lock up Britain�s poultry. However, Defra is issuing guidance to tell farmers that they need to prepare to bring all poultry stocks indoors (BBC News1, 2006). As discussed, the poultry supply chain has been a product of globalisation. The production of poultry is biased towards the East with supply chains spanning the globe. If cases of avian flu continue to appear at regions dispersed across many countries and these countries block transportation of poultry, the national and international supply of chicken, duck, turkey and so on is likely to collapse. The effects of this could greatly weaken Eastern economies. The response of global economies to the spread of avian flu clearly illustrates that this virus is contributing to deglobalisation and is affecting global supply chains. For example;

1. Hong Kong has banned imports of poultry from Taiwan (WHO says SARS helped Asia on bird flu, 2004: 16).

2. China, Indonesia and Cambodia have banned poultry imports from Vietnam, South Korea and Japan (WHO says SARS helped Asia on bird flu, 2004: 16).

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3. Japan, South Korea, Malaysia and Singapore have banned imports of poultry from the US (Overby et al., 2005: 25).

4. Japan and the EU have banned poultry imports from Thailand. Significantly, Japan and the EU are the first and second largest importers of Taiwanese poultry (Ban won�t be lifted on Thai poultry until bird flu eradicated, 2004: 50). The impact on the Taiwanese economy will be significant as in 2003, Taiwan exported around $1.5 billion worth of chickens (Overby et al., 2005: 26).

Other effects of avian flu on the supply of chicken and eastern economies include the decision of Malaysian Airlines to stop serving chicken (Asia should stockpile bird flu drugs, 2004: 12). In addition, Kentucky Fried Chicken has reported a reduction in sales of up to 15 per cent (Lynch, 2004: 6) and 20 per cent of tourists have cancelled trips to Taiwan (Lynch, 2004: 6). Unusually, BBC News 24 (2006) in reference to the UK�s reaction to avian flu commented; �The panic reduces, the closer it gets�. BBC News 24 believed that the UK population was in a greater state of panic when avian flu was first found in the East and its potential level of threat less well known. Now that avian flu is moving closer to the UK with cases in Germany and France, BBC News 24 comment that the level of panic in the UK has diminished as we are starting to understand the processes that will be taken to manage avian flu in the UK. In terms of threats to the supply chain, this finding would mean that the levels of concern regarding a particular threat are more dependant on the level of uncertainty regarding management of the threat, than the scale and consequences of the threat itself. The author presents this theory in the matrix given below; Diagram 5 - The Panic Matrix

Therefore, the more biased consumers are towards the top left of the matrix, the more likely they are to continue to purchase the product. Therefore, it would be more important to maintain continuity of supply. Despite the considerable adverse economic effects caused by the spread of avian flu, some organisations have been able to benefit from this disaster. For example, the only two pharmaceuticals who have produced vaccines that are resistant to all strains of flu; Roche and GlaxoSmithKline, have seen a consequential peak in demand for Tamiflu and Relenza respectively (Overby et al., 2005: 23). Therefore, the organisations that have the ability to minimise the impacts of a natural disaster must

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ensure the efficient operation of a global supply chain, particularly in the event of a disaster. Although a new and improved vaccine against bird flu has recently been developed, requirements for clinical tests in humans may mean it is several years before it is available on the market (National Library for Health, 2006), meaning a prolonged impact of avian flu on global supply chains. SUPPLY CHAIN MANAGEMENT � CASE STUDIES Companies such as Dell, KLM, Zara, Benetton and Wall Mart are well respected as competent supply chain managers (Hoole, 2005: 3. Slack, 2004: 429 and p440). With the pressures of globalisation forcing organisations to redesign and improve their supply chains, it is increasingly important to focus on an efficient, effective and sustainable approach to supply chain management. In response to contemporary research focuses surrounding value chain management, many organisations are seeking to simplify their supply chain. However, the simplification of supply as a supply chain with few links rather than a supply network, could mean that an organisation�s whole supply chain collapses in response to a single disaster in one country. The author believes the network approach to supply management may be a more robust structure where organisations can call on a broad range of alternative sources of supply in response to a crisis. Dell has taken a �postponement� approach to its supply chain management (Hoole, 2004: 4). By postponing the completion of products until the last possible opportunity, Dell is able to minimise levels of work in progress that would be affected by a global disaster. However, the approach of Dell also means low inventory levels and very low levels of completed goods held as inventory. Therefore, in the event of a significant disaster, supply of completed goods to the consumer could be drastically affected. Supply chains in other sectors and organisations such as diamonds, sushi, refuse, Belgian chocolates, Whirlpool appliances and CDs are also useful examples of supply chain solutions (Churchwell, 2006: 1). Rolls-Royce is one of the many organisations making use of Radio Frequency Identification (RFID) to manage its supply chains (Knights, 2006: 4). RFID helps to improve supply chain transparency and the tracking of items within complex global supply chains. Rolls-Royce is particularly using RFID in its supply chains for production of military transport and combat aircraft (Knights, 2006: 4). The author proposes that these could be defined as Rolls-Royce�s �A products� as discussed previously. Rolls-Royce has seen a number of benefits from using RFID technology, such as; routing deliveries in response to changing demand, improved asset management and a more responsive supply chain (Knights, 2006: 4). Other organisations looking to RFID as a tool for global supply chain management include Wal-Mart, Gillette and Marks and Spencer (Woodward: 26, 2006). Michelin Tyres Plc. Many of the traditional tools and techniques that are used to add value and efficiency to organisation�s supply chains may do so at the expense of being able to survive in times of crisis. For example, just in time, lean management and minimising inventory may be the key principles for improving supply chains but these techniques reduce an organisation�s ability to absorb the effects of natural and economic disasters and may even enhance an organisation�s vulnerability to risk. Juttner (2005: 127) suggests a trade-off between �supply chain performance and vulnerability�. Juttner�s (2005: 127) research concluded that organisations should �try and be lean, but not too lean�. Juttner found that the centralisation of supply could make an

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organisation�s supply chain particularly vulnerable. Organisations must therefore be aware of the magnification of unexpected risks that can be caused from adopting a �keeping all our eggs in one basket� approach to the management of supply (Juttner, 2005: 127). This theory is supported by Lynn (2005) who advises companies to �spread their suppliers among more than one nation� in order to minimise the potential Forrester effect of a disaster. From the author�s period of employment within Michelin Tyres Plc. (2003 to 2004), it was possible to study the development of the tyre supply chain within the UK. Michelin has made a number of changes to its supply chain in order to better ensure continuity of supply in the event of a disaster. Michelin�s previous UK supply chain from inbound supply to the UK through to the end customer took the following format; Diagram 6 - Michelin�s Original Supply Chain

All tyre retailers in the UK (for example Costco, Kwik Fit and ATS) are assured of next day delivery of any product currently in stock within the UK. However, unpredictable events such as; bad weather, delivery vehicle breakdowns and heavy motorway congestion were causing the guarantee of next day delivery to be breached. The redesigned supply chain also helped to minimise the effects of failures to deliver supply from manufacturing sites in Europe into the UK. Issues such as strikes at ports, falls in levels of French production every august, manufacturing problems or haulier strikes also presented risks to the European tyre supply chain which had experienced a shift away from localised manufacturing. These international risks were minimised from the supply chain changes that were made. The solution to these problems was to develop an inventory management partnership with large regional tyre retailers. These larger retailers would hold buffer stocks of the critical or most popular sizes of tyre. Therefore should a delivery fail to reach one of the smaller depots, the depot may be able to acquire stock from their large regional depot. The new supply chain model uses the principles of the hub and spoke model and is given below. Diagram 7 - Michelin�s Improved Supply Chain

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Although the effectiveness of the new supply chain was apparent, the changes made are contrary to the principles of modern supply chain thinking. Supply chain complexity increased with the addition of further links and supplementary parties making deliveries. Furthermore, there were greater levels of inventory held along the supply chain and the supply chain became a supply network. However, any negative effects or consequential inefficiencies are far outweighed by the benefits in terms of;

1. Ensuring continuity of supply and improved reliability, particularly in terms of critical or popular �A products�, for example;

a. Critical: Ambulance tyres. b. Popular: Fiat Punto tyres (widely owned car in the UK).

2. Improved satisfaction of tyre retailers and end customers. 3. Reduced complaints to Michelin. 4. Increased likelihood of repeat business, new business and customer

retention. 5. Greater ability to cope with unexpected supply chain disruptions. 6. Working in partnership with customers (these being the tyre retailers) to

develop a more robust and responsive supply chain model. Diamond Supply Chain The diamond supply chain is inherently global due to the natural location of the product (for example Africa) and the natural location of demand (for example Europe and the US). The organisation at the start of and still the centre of the world diamond business, De Beers, controls a �global cartel� of �mining, distribution and pricing� (Duke, 2001) and therefore controls the global diamond supply chains. Global diamond production has doubled sine the 1980�s to an annual trading of $57.5 billon (Duke 2001). A large proportion of the world�s diamond supply originates from many African nations including Angola and Sierra Leone. However, these nations are fraught with political unrest and terrorist groups are seizing diamond territories. Due

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to the difficulty in tracing the origins of the stones, illegitimate diamonds have easily found their way into legitimate supply chains (Duke, 2001). The impact of the rebel armies and terrorist groups caused a flood of diamonds to the market and consumers were resisting purchasing diamonds when the inhumane and horrific practices of rebel armies broke in the news (Duke, 2001). Consequentially, the price of diamonds fell dramatically, forcing De Beers to purchase excess stocks to prevent the collapse of the price of diamonds (Duke, 2001). De Beers� markets two thirds of the world supply of diamonds and owns half of the world�s mines (Duke, 2001). Its control and knowledge of the diamond supply chain was therefore an essential factor in the company�s ability to respond quickly to this disaster. In reference to the diamond supply chain, Duke (2001) reported that the �whole industry is particularly vulnerable to public opinion�. It is particularly difficult to quantify the extent of the impact of public opinion. Therefore, supply chain managers in the diamond trade need to operate flexible strategies that can support unpredictable variations in demand and supply at any stage of the supply chain. Controlling the Global Diamond Supply Chain Many of the illicit diamonds on the market originate from Angola where rebel wars have raged for 25 years. However, the Angolan government is notorious for �corruption and fraud� and so cannot be relied upon to regulate the diamond supply chain (Duke, 2001). Due to the ease with which diamonds can be filtered into the global supply chain, regulation is particularly challenging and illicit diamonds from Africa have made their way to cutting centres in Bombay, New York, Tel Aviv and Belgium (Duke, 2001). The nature of the diamond supply chain makes it impossible to guarantee the origin of every diamond, although diamond sellers are trying to regulate trade. Tiffany�s sales increased by 13 per cent after a campaign to reassure customers that the company is �doing everything feasible to bar conflict diamonds from its inventory� (Duke, 2001). Therefore, a �sales� element can be added to the author�s �Panic Matrix� as given below; Diagram 8 - The Panic Matrix: Effect on Demand

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An initiative lead by the South African government called the �Kimberley Process� has provided a governance structure for the global diamond supply chain (Duke, 2001). The aim of the Kimberley Process is to develop a system whereby all rough diamonds would have a certificate of origin. This process is not only useful for the supply of diamonds but a valuable method for controlling global supply chains of any commodity. A process by which the origin of a good can be identified at any point along the supply chain gives benefits of increased accountability and traceability and better enables root cause analysis in the event of a problem. The governments of diamond producing nations such as South Africa have their reservations however. These governments believe that �the legislation will go so far as to interrupt legitimate supply� and this would have a great negative impact on the livelihood of the people there (Duke, 2001). Alternatively, governments are concerned that there will �be no legislation to the satisfaction of the NGO�s (nongovernmental organisations)� these organisations may then disrupt legitimate supply by mounting consumer campaigns, (Duke, 2001). Governmental regulation cannot be relied upon to control global supply chains, as has been found in the case of diamonds. Therefore, efforts to improve the traceability of products within global supply chains are necessary in order to make supply chains more robust in response to a disaster. Oil Supply Chain Simmons (2005) in his book �Twilight in the Desert�, explores from personal experience that Saudi oil fields are decline. Simmons suggests that Saudi production of oil may soon reach its peak. The result could be an oil shortage that will be of serious detriment to the sustainability of global supply chains and associated transportation. The globalisation of the oil supply chain is a topical issue and presents a supply chain that is particularly likely to be subject to unexpected disasters as hypercompetitive markets place oil and petrol in states of ever rising demand. 70 per cent of all country�s reserves are in US dollars, primarily for the reason that oil is mostly priced in dollars (Flurry, 2005: 16). However, the fourth largest oil-producing nation, Iran, is planning to create a Euro based oil exchange for launch in March 2006. The consequence of this move is likely to mean an upward shift in trading in Euros and therefore affect the levels and locations of oil trading via global supply chains. Flurry (2005: 17) even predicted that the consequential reduction in trading in the US dollar and fall of the value of the dollar could mean �the US would simply have to stop importing�. Therefore, by creating global supply chains, countries have outsourced production of many high priority goods. If a country loses economic stability and has to cut back on imports, consumers will face an immediate reduction in levels of choice in the marketplace. In fact, the pre world war two economies of the UK and US, may be able to teach us a lot in terms of the ability to be self-supportive in times of a disaster affecting global supply chains. MANAGING GLOBAL SUPPLY CHAINS Types of Risk Characteristics of global systems that may cause unexpected threats to continuity of global supply chains include (Sarofim, 2006);

1. Physical and social changes in regions. 2. Systems that impact on or are impacted by humans. 3. Systems that are experiencing or that are likely to experience changes that

will cause economic problems.

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Global supply chains are fraught with unexpected variables and threats. Differences in terms of regulations, laws, tradition and culture: resent challenging complexities for any supply chain manager. For example the �Hush-kit Ban�, an EU law preventing use of noise mufflers on US aeroplanes presents problems in terms of transportation used to support global supply of US goods. Research by Harland et al. (2003) found that over 50 per cent of potential causes of risk to an organisation are invisible to the organisation. Mason-Jones and Towill (1998) propose five risk categories that can affect global supply chains;

1. Environment, external uncertainties. For example, Mad Cow Disease. 2. Demand, outbound logistics and product demand. For example, seasonality

of demand. 3. Supply, supplier activities and relationships. For example, failure to supply

inbound logistics. 4. Process, processes between divisions of the supply chain. For example,

information technology. 5. Control, supply chain control mechanisms. For example, policies regarding

levels of safety stock. ICEAW (2002) also proposed five categories of supply chain risk; strategic, operational, financial, compliance and environmental. Manning and Baines (2002: 827) have championed globalisation in terms of the numerous benefits it can bring to organisations, consumers and global economies. However, they also highlight the inherent risks. These risks are given particularly in terms of the supply of food that has recently been so fraught with risks in terms of the spread of animal disease and zoonoses. These risks not only affect direct supply of food but also have financial and health implications throughout the food supply chain. Globalisation is not solely subject to existing and independently emerging new world uncertainties. The impacts of globalisation may also be the causes of the threat of decline in the global economy in terms of national unrest and terrorist attacks as a product of globalisation. The �convergence of technology� and an �explosion of wealth� have made the world�s two largest nations, India and China a �huge new stake in the success of globalisation� (Friedman, 2005). However, Friedman questions whether the effect of globalisation in hypercompetitive markets has meant;

�the world has gotten too small and too fast for human beings and their political systems to adjust in a stable manner�

Two fifths of African nations at war, the average life expectancy is 40, investment is low due to lack of collateral and foreign aid has had little direct benefit on the lives of the poor (Guest, 2004). Globalisation has meant that instable nations such as this are now part of the supply chains of goods to and from the rest of the world. Nations such as the UK and US are relying on volatile and unstable nations as part of global supply chains of many desirable and vital goods. Strategies to Deal with the Risk 80 per cent of businesses that have suffered a disaster and not had a contingency plan have gone into liquidation within a year (Crossley: 38, 2006). Following the increasing number of threats to the sustainability of global supply chains, organisations are responding to the need to develop effective supply chain risk management strategies. Manning and Baines (2002: 825) recognised the need for supply chain risk management to become a core business process and identify six key factors that should be included in an organisation�s supply chain risk management strategy;

1. Identify and rank risks, 2. Determine if the organisation can accept any of the risks,

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3. Determine whether the organisation can not competently manage any of the risks,

4. Identify risk management tools and techniques, 5. Monitor the effectiveness of the risk management system, 6. Implement preventative and corrective actions.

Manning and Baines (2002: 826) give the four main strategies for coping with these risks as being;

1. Accept the risk. 2. Transfer the risk to a third party. 3. Risk sharing provisions with customers or suppliers, 4. Adopt an exit strategy and eliminate the risk.

The growth of globalisation has made supply chains more and more complex. Some researchers such as Hoole (2004: 5) view the key to coping with globalisation as being the simplification of supply chains by removing unnecessary links and complexities. Many unpredictable and often extreme risks have affected organisations operating on a global basis. It is therefore vital for organisations to adopt an 'expect the unexpected' approach to their supply chain management and to develop comprehensive contingency or continuity strategies. Not only must organisations develop contingency plans, but they must put into place systems for regular review of these plans and dissemination of the content of the plan throughout the entire organisation and where applicable its customers, suppliers and other associated bodies. Research by Juttner (2005: 125) involving a number of focus groups highlighted the importance of �institutionalising contingency� and �joint continuity planning� along the supply chain. Juttner�s (2005: 126) research also found that 20 per cent of the organisations included in the focus group never develop contingency plans in partnership with suppliers and 36 per cent never develop contingency plans with customers. Although continuity plans are vital to the maintenance of supply chains in the event of a disaster, a continuity plan is no use if it is too long, complicated or is not disseminated within the organisation. Trevor Partridge, business continuity manager at Marks and Spencer (Partridge: 34, 2006), believes that a continuity plan should be �slim� and �only referred to when really needed�. Partridge also stresses the importance of educating the organisation on the continuity process and rehearsing the actions to be taken in the event of a disaster. Marks and Spencer operates continuity plans covering each of its 400 UK offices and stores, focussing particularly on supply chain management (Thomas: 34, 2006). An effective continuity plan is an organisation�s reference point for crisis management. In the words of Partridge, the continuity plan is about �protecting people, property, profits and the brand�. A worthwhile focus of risk management strategies would be IT services. More and more organisations relying on IT supply chain management tools such as RFID and data warehousing software (Knights: 8, 2006). Thomas (p33, 2006) reports that 70 per cent of businesses are suffering annual downtime as a result of failure in IT systems. He estimates the associated cost of this to be around £52,000 per hour. Therefore supply chain risk management strategies should account for IT support in the event of a disaster. Organisations such as Asos.com are even going to the lengths of storing their IT servers and IT supply chain management systems in bomb-proof bunkers (Everett: 36, 2006). CONCLUSION

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Juttner (2005: 131) concludes that his research found 44 per cent of organisations expected their supply chains to become more vulnerable over the next five years. Supply chain managers need to expect the unexpected and develop a strategy for the management of supply chains in the event of a crisis. Certain events such as the millennium bug can be predicted. Some threats can be expected even if the timescale is not known, examples are terrorist attacks and political tensions. Particular disasters can be expected to affect a growing number of countries in the near future, such as bird flu. Other unexpected crises occur completely without warning, for example the devastating Tsunami of December 2004. Smaller or more confined disruptions such as employee strikes, a warehouse fire or server failure can also lead to massive disruption as the effects are magnified within global supply chains by phenomenon such as the Forrester effect. Such is the potential impact of even a small unexpected variable, organisations need to develop strategies that will come into immediate effect to maintain the strength of their supply chains in the event of a disaster. In order to support the move towards global supply chains, organisations also need to minimise cross cultural differences, enable information sharing and improve transparency throughout the supply chain. Although globalisation has undoubtedly brought global economies numerous and substantial benefits, the future of globalisation needs to be supported through the development of comprehensive supply chain risk management strategies. Many organisations are competent in traditional supply chain methodology such as just in time, vertical integration and value chain principles. However, it is essential that organisations incorporate an analysis of their supply chain�s ability to survive a global disaster and to develop strategies to minimise potential risks. The approach that organisations must take in order to manage risk from a strategic supply chain perspective must include an analysis of the increased risk caused by their own supply chain strategy. Use of traditional tools and techniques must be challenged in terms of their continuing effectiveness as the global environment becomes ever more complex. These complexities exist in terms of; culture, competitiveness, politics and environmental market pressures and many additional uncertainties. Organisations must also aim for improved levels of transparency of their supply chains. Organisations should additionally endeavour to put mechanisms into place that will enable them to develop sustainable supply chain management strategies in partnership with customers and suppliers. The authors have analysed a number of case studies to present contemporary solutions to the management of global supply chains within variable hypercompetitive markets. Of these, five key supply chain management strategies are summarised below. Table 9 - Successful Supply Chain Strategies

EXAMPLE GLOBAL SUPPLY CHAIN STRATEGY

ACTION

Rolls-Royce Technology RFID tracking Michelin Supply �network� Inventory holding along the

supply chain De Beers Control and experience Management of growth of

illegitimate trade South African Government Traceability Tracking of goods Marks and Spencer Expecting the unexpected Comprehensive

contingency planning

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The authors have set the context for the globalisation of supply chains by presenting a number of the factors that have contributed to the growth of globalisation. These factors include lower production costs and regulatory and competitive pressures. The positive and negative effects of globalisation are given as direct and indirect consequences of globalisation and also factors that may impact on global supply chains. The authors highlight the need for comprehensive contingency planning and the need for organisations to identify �A products�. Deriving from case studies of the Avian flu disaster and the challenges placed on the global supply of diamonds due to illegitimate trade, the author has developed the �Panic Matrix�. This matrix suggests a relationship between the level of information given to consumers regarding supply chain management strategies, the potential impact of a disaster and the resulting level of consumer demand. This level of demand is an indicator therefore of the level of necessity to maintain supply in the event of a disaster. This research identifies a sliding scale in the levels of predictability and impact of disasters on global supply chains. Diagram 10 - Predictability and Impact of Disasters

The authors conclude that a number of accepted theories for improving efficiency of supply chains may do so at the expense of a supply chain�s ability to marginalize the impact of a disaster. Traditional theories including just in time and lean management are analysed for their continued applicability in times of crisis. In order to successfully create sustainability within global supply chains therefore, strategies such as improved traceability, identification of �A products� and monitoring levels of consumer panic are given as key tools to global supply chain management. Moreover, supply chain managers must continuously review, revise and publicise their contingency planning models and bear in mind to expect the unexpected.

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