MSCI GROUP ASSIGNMENT:
Supply Chain Vulnerability
Group 6
1. Diana Lyani Yew Farouk Yew (34306404)
2. Nur Afiqah Sari Daut (34306978)
3. Nadia Abir Najyha Mohd Najib (34306994)
Table of Contents
1. Introduction 3
2. Carbon dioxide (CO2) shortage in Britain 3
2.1 CO2 supply networks 3
2.2 Mechanisms affecting failure in supply chain risks 4
2.3 Usefulness of news reports 5
3. China’s 2008 Milk Scandal 6
4. Summarisation of Journal Papers 8
4.1 Supply Chain Risk 8
4.2 Supply Chain Vulnerability 8
4.3 Approach After a Serious Sub-Suppliers' Accident 8
4.4 Supply Chain Disruption 8
5. Conclusions 9
6. References 10
1. Introduction
Wagner et. al (2006) states that supply chain vulnerability is a function of certain supply chain characteristics where the loss of a firm is due to its supply chain vulnerability towards a given supply chain disruption. Two cases were presented to unravel the importance of SCRM on supply chain vulnerability. A detailed explanation on those cases were laid out in the first section followed by summarisation of four journals which further helps in the understanding of both cases.
2. Carbon dioxide (CO2) shortage in Britain
2.1 CO2 supply networks
Upstream activities in the carbon dioxide supply chain are divided into two tiers of suppliers. Ammonia plants as the first-tier supplier receives raw materials from its second-tier suppliers to manufacture fertiliser where CO2 gases are produced as a by-product. CO2 released are then captured and extracted to be sold commercially to first-tier customers in the demand side which are the manufacturing factories mostly in the food and drinks industry. The downstream activities continue as the first-tier customers distribute its products, to second-tier customers, the retailers which then sells to end customers.
In the demand side, first-tier customers such as Ocado uses CO2 to create dry ice to keep the food frozen during transportation. CO2 is also used to kill farm animals in the slaughtering process and also to extend the shelf life of fresh meat and poultry in vacuum-sealed packaging. CO2 is also added to fizzy drinks and beers to add sparkle, flavours and preserve the drink (Smithers, 2018). Warbutons requires CO2 for its production of crumpets.
The CO2 shortage in Britain was caused by an unexpected high number of ammonia plant closures during the summer (Mikhailova, 2018). The long-term partnership relationship between the manufacturers and retailers means that the shortage of CO2 affecting the manufacturers will also affect most retailers from the second-tier customers as they are unable to cope with the shortage of their inventories to supply to end customers. This relationship is described to be in a long-term partnership as both are committed to gain mutual advantage, which is to deliver the products to end customers.
Other sources of CO2 are from bio-ethanol plants mainly in Europe. There seems to be a contract-based transactional relationship between the first-tier supplier and first-tier customers as there is inherent flexibility in outsourced supplies. This parallel sourcing allows the first-tier customer to switch to alternative suppliers who provides CO2. However, as CO2 is difficult and expensive to export, manufacturers tend to depend on local suppliers (Mikhailova, 2018). Having only one plant operating in the UK has left a huge impact on manufacturers as supplies are going low when demand for CO2 is increasing drastically during summer. Failure to supply CO2 from the upstream activities would mean that productions of food and drinks are forced to halt which then affects retailers’ stock-up. This shows that the risk in the supply chain is the highest in the first-tier supplier.
2.2 Mechanisms affecting failure in supply chain risks
The supply network of food processing and drinks industries failed in its supplier development process as they could not fulfill the requirement of the perception gap. Mismatch assumption between the first-tier supplier and its first-tier consumers make it harder for them to build resilience against dramatic changes in its upstream level of supply chain (Tate, 2018). It shows when the industry could not cope with the unexpected closure of ammonia plants (Mikhailova, 2018). This is due to negligence in recognising a single point failure that could occur at any time in the year (Tate, 2018). As a result, all productions of CO2 infused processes are remained at halt while some even had to stop its production line.
The problem escalates when a fairly consistent consumption suddenly rises due to a chaotic demand. The bullwhip effect shows when beverages industry was not prepared to face the heatwave that had recently hit Europe. It had compounded the position of soft drinks and beer industry making them more desperate in obtaining the gas (Sampson, 2018). They failed to supply for the increasing number of demands as no contingency measure was made to ensure supply chain continuity. The agility of this lean supply network was badly reflected as it was not flexible towards the current issues due to none exposure of risk was identified. The repercussion has caused Britain to face its worst supply situation in decades (Sampson, 2018).
On top of that, the rise in natural gas which is a major raw material for ammonia production and fall in its market price also causes disruption in the supply network as European producers are prolonging their downtime (Daneshku et al, 2018). Due to that, customers in the tier-one demand side were struggling in maintaining their level of inventories to avoid any stockout just until the end of summer. The lack of transparency in transferring the length of supply disruption from tier one supplier to its tier one customer caused a long-lasting impact for them to adapt in the dramatic changes that had happened around them.
2.3 Usefulness of news reports
Most of the news reports found mainly give explanations on how CO2 is commercially produced using simple words which is relatively easy for general readers to understand. Most of the articles also clarify how CO2 is used throughout the supply chain especially for the food and drink industry- a good way to relate between the shutdown of ammonia plants and effects to the CO2 supplies giving audiences a better picture to understand the situation as a whole. Impacts of its shortage to various industries such as poultry industry, brewers, and soft drinks manufacturer are also explained which indicates the severity of the supply chain risk.
However, it can be argued that most articles are just focusing on customers (first-tier customers, second-tier customers and end user) and not focusing on the industry producing it. Major industrial companies which include Messer, Air Liquide, Linde and Praxair have all remained silent on the situation (Perkins, 2018). Presidents of these companies would not comment anything when approached by reporters. Their actions of not commenting on the issue might create speculations that they are being irresponsible with this matter. Moreover, there was only a little information about second-tier supplier that supply raw materials to ammonia plants. Disrupted supply chain in this case could be because of the raw materials. However, with the void of information created, no precise conclusion could be made.
To avoid further gaps in supply chain network, the government was urged to help keep the supply chain moving (Perkins, 2018). Government was said to be in contact with the relevant companies and trade associations, however, there was no follow-up reports found which could lead to a conclusion that the headlines might just want general readers to not worry about the shortage. BBC (2018) claimed that CO2 reduction this year “does not reflect the overall UK CO2 market situation" while other reports said that the severity of the shortage could take up to three weeks to return to normal (Smithers, 2018). Difference in headlines of articles could trigger confusion among readers.
In conclusion, most of the articles found did not discuss in-depth details about the nuisance. Reliability of the reports is questioned as it could be a one sided-story to cover up companies by window-dressing them and not revealing the truth to the public.
3. China’s 2008 Milk Scandal
China’s infant milk tragedy in 2008 caused an outrage among consumers which led to an international outcry about the food safety standards (BBC, 2010). It was found that melamine was used in infant milk powder to indicate higher protein content but caused kidney stones and kidney failure among babies. Sanlu Group, being the largest dairy producers in China was identified as the main culprit. However, as the scandal unfolded, more Chinese dairy firms were implicated in the scandal too (Huang, 2014).
The problem started when multiple sourcing strategy made by Sanlu went highway when its second-tier supplier was identified and traced to the usage of ‘protein powder’ (Huang, 2018). BBC (2008) claimed that these suppliers have no bargaining power as their businesses are small, leaving them little ability to influence the market. This contract-based transactional relationship shows how farmers are under constant pressure due to high competition leading them to dilute the raw milk with water and added melamine sold by the middlemen based on an arm’s length transaction to earn more profit.
This is different when compared to the CO2 case where the disruption of the supply chain begun in the second-tier suppliers who provided the tainted powder to Sanlu. They failed in advising their product development process when illegal material was added. As a result, Sanlu was not informed of the internal developments made causing the end customer to suffer (Huang, 2018). This was due to the negligence in setting up a mechanism to ensure a two-way transparent flow of information between suppliers. Contrary, looking at CO2’s case, its end customer does not suffer as much as where their side of lack in transparent information only causes them to incur shortages of food supply and not health deficient. Their information was not crucial in ensuring that ethical social responsibility against consumers was laid out and dealt with to avoid any mishaps.
On top of that, the failure of this supply network aggravated when the bullwhip effect of this problem due to severe price competition for raw milk happened during the early stage of mass production (Xiaojing, 2011). It was leading China’s dairy manufacturers to consider using domestic raw milk due to its low price and led to quality disregards during their product development process. Comparing it to the CO2 case, it shows that their failure in handling the bullwhip effect caused significant damages throughout the whole supply network due to the ignorance in providing products that the end customer demanded. However, manufacturers in the CO2 case only failed in forecasting their supply network causing them to face shortages during summer due to sudden heatwave and closure of ammonia plants and not disregarding the quality of product.
Despite that, the scandal did not break openly to the public. Sanlu controlled the media to avoid negative image for China around the Olympics and secure their customer base. They would only disclose this matter to local government officials and quietly recalling all products. Eventually, reports were published even under strict reporting advisories, drawing global attention to the problem. Contrary to the CO2 issues, it was discussed openly in the UK due to the development in information and technologies over the last ten years. This distinguishes the milk scandal as China has “top-down regulatory method” where it does not expose the business processes with public, particularly with the lack of press freedom (Huang, 2018). To conclude, it is vital for authorities to provide a clear understanding for any actions taken (Tritscher, 2009).
Undoubtedly, what Sanlu expected to happen finally happened. Customers in China lost their confidence in domestic brands and prefer foreign brands instead after the tailspin incident (Huang, 2018). Farmers then suffered loss as price of milk dropped and feed costs to cattle increased. Chinese dairy firms were in financial distresses as firms could not maintain the production of milk since demand was low. Firms also have to bear with lawsuit expenses, increases in insurance premium and plummeting of stock prices (Qian, 2011). Specifically, Yili milk, Bright Daily and VV Group experienced major losses from year to year due to the scandal (Xiaojing, 2011). Subsequently, the export of Chinese dairy products decreased resulting to the loss of overseas market completely as some countries banned all imports of milk products from China either selectively or entirely due to the issue (Tritscher, 2009).
However, it can be argued that Sanlu should not be blamed solely as there was no national standard that require testing for melamine. In fact, Sanlu was able to pass all the quality test for dairy products. Inadequate oversight and supervision from the government led to Sanlu’s supplier and collection agents to add melamine causing a misleadingly high levels of protein. The standard system of controlling and monitoring food products were proven to have serious flaws (Qian, 2011). Following this scandal, China passed a new legislation on additives and restructured agencies that manage food and drug safety. New rules have been enforced specifically for infant milk making it compulsory for manufacturers to register their formula (Huang, 2018). A need to achieve a common ground which lead to a harmonised internationally recognised standards that protects consumers’ health and ensure fair practices in the food trade is achieved through Codex Alimentarius Commission (Tritscher, 2009).
4. Summarisation of Journal Papers
4.1 Supply Chain Risk
This paper discussed the empirical study of supply chain risk management (SCRM) based on a survey with 67 manufacturing plants in the German automotive industry. This journal examined key drivers of supply chain and vulnerability in a business environment that has a high complexity and uncertainty. Moreover, instruments of SCRM is observed where two groups are created to present different approaches in SCRM. The results of this observation showed that companies with high degree of supply chain risk have high performances in business. Undoubtedly, this is well-proven in both cases as businesses involved in the issues discussed have high performances in their respective industry. Other than that, results also showed that the group using reactive SCRM has advantages in reduction of the bullwhip effect and external disruptions resilience. Preventive SCRM deals better with flexibility and decreased stocks. In the journal, Hendricks and Singhal stated that supply chain disruptions have negative impacts on stock prices. This is true for dairy enterprises in China as mentioned before. In spite of the brief literature reviews discussing about SCRM, there is still a deficit of academic work and all of the risks should be investigated empirically before being regarded as effective.
4.2 Supply Chain Vulnerability
Wagner et. al (2006) discussed the empirical investigation into supply chain vulnerability based on a study contribution of Papadakis (2006) where individual firm level is taken. It posits that supply chain vulnerability is a function of certain supply chain entities that when it faces disruption and results in a loss, it is due to vulnerability of the firm itself. It examined three drivers that causes the disruption and found a relationship between supply chain vulnerability to demand-side risk, supply-side risk and catastrophic risk. Undeniably, it shows through both cases that were discussed above as disruption in the supply-side risk and catastrophic risk causes firm to be vulnerable in creating a robust mechanism to mitigate those problems. This is due to strong supplier dependence and global sourcing network which is directly shown in the results of the journal. Nonetheless, there is still deficit of this academic journal as it does not answer the underlying influence of supply chain disruption into its performance or a firm performance.
4.3 Approach After a Serious Sub-Suppliers' Accident
This journal addressed on the interest of supply chain risk management (SCRM) solely based on Ericsson who changes its organization, processes and tools focusing on SCRM. Ericson, the largest supplier of mobile telecom systems faces risks in its production due to a 10-minute fire in one of its cells. The incident causes Ericsson to suffer a huge loss and withdrawal from the mobile phone terminal business. Due to that, the firm changed its focus in management into SCRM by adding more people and functions into it. As a result, Ericsson was able to provide for insurance and was offered an insurance premium due to its detailed level of information transformation. This journal shows that firms which focus its management into SCRM can create a long, lean and interconnected chains. However, there are some restrictions as it needs to have an open discussion with the suppliers for it to work. This method could be implemented by suppliers in the CO2 case and China’s infant milk tragedy. They could avoid such mishaps as their supply chain would be more secured and less vulnerable towards supply chain disruption.
4.4 Supply Chain Disruption
Craighead’s article discussed how supply chains are inherently risky as they will eventually experience unanticipated events disrupting the flow. Propositions related to the severity of supply chain disruptions have been derived consisting the design characteristics of density, complexity and node critically to mitigation capabilities of recovery and warning. This paper discussed how an unplanned event disrupting a dense, complex a supply chain with many critical nodes will less likely to be severe if it is able to detect and disperse information about the event and respond quickly and effectively to correct it. This is proven in the CO2 case where suppliers took action to reopen the ammonia plant as soon as possible to meet the demand in the downstream activities. Contrary to China’s milk scandal where the dairy firms were unable to recover from the destruction as the impact was too dreadful. The propositions discussed offer guidance for both cases to what extent the disruptions could be detected and dealt with using mitigation capabilities available in both cases. When resources are scarce such as the CO2 case, the supply chain design characteristics are able to help in evaluating what actions could be taken to ration the scarce resources and to develop, enhance and allocate warning and recovery capabilities within the supply chain.
5. Conclusions
In both cases, it is shown that coordination and clarity of information are vital to help control an outbreak. Appropriate actions need to be taken to minimise supply chain risks. Withholding information and actions will affect negatively on the credibility on all that involved.
6. References
BBC (2018) “CO2 plant hit by power outage as sister site restarts” [online] Available at:
https://www.bbc.co.uk/news/business-44707965?intlink_from_url=https://www.bbc.co.uk/news/topics/cyqpypkp6wqt/co-shortage&link_location=live-reporting-story [Accessed on 21/11/2018]
Daneshku, S., et al (2018) “How the CO2 shortage is affecting the food and drink industry” Financial Times, June 30 [online] Available at: https://www.ft.com/content/36183d1e-7b73-11e8-bc55-50daf11b720d [Accessed on 21/11/2018]
Huang, E (2018) “Ten years after China’s infant milk tragedy, parents still won’t trust their babies to local formula” Quartz, July 16 [online] Available at: https://qz.com/1323471/ten-years-after-chinas-melamine-laced-infant-milk-tragedy-deep-distrust-remains/ [Accessed on 24/11/2018]
Huang, Y (2014) “The 2008 Milk Scandal Revisited” Forbes, July 16 [online] Available at: https://www.forbes.com/sites/yanzhonghuang/2014/07/16/the-2008-milk-scandal-revisited/#6ed117984105 [Accessed on 21/11/2018]
Mikhailova, A (2018) “What caused the UK’s carbon dioxide shortage?” The Telegraph, June 22 [online] Available at: https://www.telegraph.co.uk/news/2018/06/22/caused-uks-carbon-dioxide-shortage/ [Accessed on 21/11/2018]
Perkins, C (2018) “CO2 crisis explained: What's caused the shortages and how is UK food & drink affected?” The Grocer, June 20 [online] Available at:
https://www.thegrocer.co.uk/stores/supply-chain/co2-crisis-explained-causes-drivers-and-the-impact-on-food-and-drink/568425.article [Accessed on 21/11/2018]
Sampson, J (2018) “CO2 supply crisis hit Europe” Gasworld, June 19 [online] Available at:
https://www.gasworld.com/co2-supply-crisis-hits-europe/2014944.article [Accessed on 21/11/2018]
Smithers, R (2018) “CO2 supply issues may trigger meat shortage, processing industry warns” [online] The Guardian, July 2 Available at: https://www.theguardian.com/business/2018/jul/02/co2-supply-issues-may-trigger-meat-shortage-processing-industry-warns [Accessed on 21/11/2018]
Tate, D (2018) “Supply Chain Back to Basics and the Carbon Dioxide Shortage” Marsh, July 17 [online] Available at: https://www.marsh.com/uk/insights/risk-in-context/supply-chain-back-to-basics-carbon-dioxide-shortage.html [Accessed on 21/11/2018]
Tritscher, A., et al (2009) “The Melamine Incident: Implications for International Food and Feed Safety” Environmental Health Perspectives, Volume 117(12):1803-1808 [online] Available at: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2799451/ [Accessed on 24/11/2018]
Xiaojing, L (2011) “The Cause and Effect Analysis of the Melamine Incident in China” Asian Journal of Agricultural Research, Volume 5 (3): 176-185 [online] Available at: https://scialert.net/fulltextmobile/?doi=ajar.2011.176.185 [Accessed on 24/11/2018]