Market Reports

Proofing supply chains against future shocks

A few years ago, Stephen Hurst, from specialty coffee merchant Mercanta, received some rather unpleasant news. After undergoing all the effort needed to transport two containers of coffee across continents, he was told that the shipping line had gone bankrupt in the midst of the shipment. “Our containers were simply unloaded at the nearest port at the time,” he explains. “We had to figure out how to recover them.” While this is the “one of the worst examples” Hurst can remember, situations like these are not uncommon in the coffee trade, one that relies on a vulnerable supply chain, spread over countries at varying levels of development. Dexter Geertman, a specialist in supply chain management and modern manufacturing resource planning (MRP-2), knows the complexities of trying to find some security in the chain. While businesses can protect against disruptions by adding supply chain redundancy, he says this sits at odds with modern trends for streamlined supply and “just-in-time” inventories. So how can companies balance the need for supply chain efficiency while having enough flexibility to deal with shocks in the chain? This is a paradox that could have an impact on stakeholders at every point in the global supply network. To understand how supply chain disruptions are relevant to a company’s operational situation, Geertman recommends that the first step should be a supply chain vulnerability audit. He says it’s best to start at the end: look at the needs of customers, and then work backwards to product suppliers, and finally material suppliers. “The aim of this initial step is to identify vulnerabilities at every link in the chain,” he says. The second part of this scenario analysis is a “what-if” audit, looking at the knock-on effects of macro events. “Companies which are supply chain resilient identify disruptions and develop contingencies to overcome them,” he says. “This creates a strategic supply chain design optimised against shocks, laying the foundation for complete business continuation planning.” The results of these two steps, he says, should hopefully provide decision-makers with an overview of their operations. This facilitates the next step of implementing a strategic supply chain plan to mitigate the impact of disruptions. The trend towards lean inventory means modern coffee supply chains are already stretched, resulting in inherent vulnerability. Experts like Geertman are calling for customers to reconsider their inventory positioning, sourcing and transportation options to create a more flexible, resilient supply chain. Dr. Jeff Karrenbauer, President of supply chain solutions provider Insight, recommends a minimalist approach to inventory. “Companies should compare the cost of stockpiling inventory against the risk of losing sales and customers, creating a negative impact on bottom-line profitability,” he says. “Too much inventory at the wrong location adds to bottom-line costs. Determine optimal inventory policies and levels to sustain your company, and build efficiencies from there.” Recent natural disasters have highlighted the fact that logistics is an area subject to on-going threats. Consider the release of volcanic ash into European skies, or the global implications of localised flooding in Thailand. Karrenbauer says a sensible approach is to have several routes built into delivery frameworks. This would include a back-up solution, and applies to all elements of the supply chain. He says that for buyers, this means having more than one source of supply. For deliveries, it’s about having a short-notice transportation company who is able to step in and fill a gap – albeit at a higher cost. Sean Cairns, General Manager of Sonoco Consumer Products Europe, a large packaging company operating in the coffee sector, says that he takes a similar approach when it comes to sourcing materials. “We developed a robust and integrated supply chain for producing paperboard for the coffee industry,” he tells Global Coffee Review. “Relying on cans produced from one material would tether us and expose us to supply shortages and changes to raw material price. Our mills use recycled fibres rather than virgin timber to enable us to be a low-cost provider.” He says that analysis of the supply chain and the formulation of contingency plans are just the first steps in a process that should be continually evolving. New government regulations, supplier changes, the opening of new hubs and changes in the location of customers all require alterations to the resiliency plan. “Consider it something which should be under constant evaluation and modification, and reflective of a company’s dedication to providing security to itself and to its customers,” he says. The current appetite for ‘skinny’ chains might have created some instability where there was none before. How a stakeholder responds to this issue may depend on their own ability to absorb and mitigate as a result of their location and capacity. Hurst says that Mercanta’s embracement of packaging and cupping improvements has meant that he can now monitor the ageing of goods in-warehouse, giving him greater flexibility. “Some product lines are in great cupping condition six to 12 months after arrival,” he says. “Other lines are losing their quality after three months. This is a matter of cupping and re-cupping inventory. Old raw coffee beans rarely become un-saleable.” Hurst describes the company’s approach as somewhat holistic. Although he recognises the need for redundancy in managing stocks, he tries to plan a considered approach by taking advantage of improvements in packaging, and subsequently, marketing. This results, says Hurst, in a flexible management system for buffer stock, plus the additional benefit that the right customers are getting products appropriate to them in a much more targeted way. The use of new products or technologies may also bring value to the reinforcement of supply chains in the future. Jim Cain is an international sourcing expert who selects high quality coffees for gourmet coffee club, He says investment in bio-technology to cultivate more resistant strains is underway in all coffee growing regions. He notes that this in itself adds redundant protection from the one thing that cannot be truly controlled – the weather. He says that the force of nature is the largest contributor to supply chain instability. “Brazil supplies over 30 per cent of the world’s coffee and the coffee producing regions are situated mainly on high terrain,” he says. “Cold fronts from the Atlantic sweep in to these regions causing frost, and resulting in damage to crops. The last time was in 1999 when 40 per cent of the crop was lost.” Cain says it’s important that, when planning for shocks, decision-makers have mitigation strategies that span all the way up to major disaster levels.
Insight’s Karrenbauer agrees, saying that CFOs and others involved in corporate risk analysis and reporting need to take a realistic view of business risk from “unimaginable real-world events”, which have a high chance of taking place. He highlights the importance for long-term reviews of supply chains, not just short term corrective action. He says that longer term mitigation strategies might include a review of office locations, production facilities and hubs. This is not something likely to happen overnight for most operators. He adds that the location of customers also has a bearing on this, along with associated issues regarding capacity at location, and accessibility of raw materials or product from one’s own suppliers. Karrenbauer insists it is important a company’s mitigation strategy goes hand in hand with the organisation’s own strategy for growth.  Relocating a production facility to an area which does not flood, for example, may seem sensible, but if the company plans to invest in staff or new machinery, then extra facility costs may be untenable. Cost implications, particularly those involving large single lump sums of capital expenditure, may be an answer to the original question: namely, why are there companies which still do not have plans in motion, or at least in place, for effective supply chain disaster proofing? There are examples of progress being made in areas of supply chain resiliency which are less expensive for operators. Luke Salway, Director of Business Development at NLP Top Coaching, which operates throughout South-east Asia, gives an example of a low-cost improvement in supply chains. In Thailand, organic coffee farming has only come along slowly, with a limited number of Certified Organic producers. Certification here is handled by Organic Agriculture Certification Thailand (ACT), a private non-profit foundation, or the Organic Crop Institute, a public agency under the Ministry of Agriculture and Cooperatives. Thai farmers have proven to be reluctant to undergo what they often see as unnecessary levels of bureaucracy. This means that merchants who want to sell organic beans have a restricted choice of sourcing options – something that could represent a threat to the supply chain. Some merchants are now working directly with small, non-certified Northern Thai farmers who are already producing crops to organic standards to get certified. The result is an increase in the number of organic growers at relatively little cost to merchants. Additionally, both parties benefit from an emboldening of the relationship, and an increase in the value of the product. This improvement, Salway says, is the result of conducting an effective supply chain vulnerability audit as a very first step in setting up business.
“Rather than presenting additional costs to stakeholders, the supply chain review has revealed a resiliency improvement,” he says. ‘This has a positive effect throughout the entire chain. Everyone, from the grower to the final buyer, is happy.” GCR

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