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Mon 1 Jan 2007 12:00 AM

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The importance of supply chains

The increasing outsourcing of production to the Far East has introduced heightened complexity into global supply chains.

The increasing outsourcing of production to the Far East has introduced heightened complexity into global supply chains. In addition, product life cycles are shortening, more new products are being introduced at an ever faster pace, customers are becoming more demanding and to add to the equation, companies are attempting to have ever reducing inventory. This is the reality in which the supply chain/logistics teams have to operate and the response to these challenges is critical to the financial health of individual companies.

As a result of these dynamics, and with the increasing complexity through globalisation, supply chain disruption is becoming ever more a risk and as a result has assumed a significantly higher position within a company’s agenda, or if it isn’t, it certainly should be.

A recent paper from Kevin Hendricks and Vinrod Singhal - “The Effect of Supply Chain Disruptions on Long Term Shareholder Value, Profitability and Share Price Volatility”- clearly highlights that companies suffering from supply chain disruption problems experience between 33% and 40% lower stock returns relative to their benchmarks over a three-year period and that these supply chain disruptions have a significant negative effect on profitability. It does not matter who caused the disruption, what was the reason for the disruption, what industry a firm belongs to or when the disruption happened – the outcome is that significant supply chain disruptions devastate corporate performance.

Some of the potentials for supply chain disruption are common – security issues, strikes etc – but many are within the control of companies themselves. The challenge is for companies to manage investments in their supply chain and their outsourcing strategy so that they are aware of the risks and take every effort to mitigate these risks. It is now a recognised fact that supply chain investments and initiatives should be undertaken in many instances, not because they reduce cost, but because they increase the reliability of supply chain efficiency.

Managements have a responsibility to their customers, to their employees and their shareholders but nowadays there is a much clearer focus on how managements discharge their responsibilities.

Supply chains affect almost every aspect of a business and a signifi cant failure within the supply chain can have a devastating financial impact on a business. Therefore companies should install supply chain management as an integral element of their board meetings. Unfortunately this is still not the case for many companies and as a result the supply chain/logistics teams do not have the necessary support within the company. Too often it is all about cost reduction, cost reduction and cost reduction.

Companies who have a clear focus on developing a superior supply chain perform significantly better for their customers, their employees and for their shareholders.

Surely this must be the objective for all companies.

Michael Proffitt is the CEO of Dubai Logistics City (DLC). If you would like to comment on this column, please email logistics@itp.com.

"A significant failure within the supply chain can have a devastating impact on business"

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Prof Philbert Suresh 13 years ago

It is clear that global supply chains have introduced a new element of a competitive advantage and it is well indicated that risks are inherent in such operations. So it is not a competition between compnaies but among supply chains in the world. A paradigm shift that is still not well realized by many in the Middle East.