Preparing for Supply Chain Disruptions: Four Realities Executives Must Address
Just hours before Hurricane Sandy hit the US east coast, New Jersey resident rushed to grocers, gas stations and hardware stores for emergency supplies; in many cases, they found the shelves were already bare.
But are companies any better at storing emergency supplies for disasters and other supply chain disruptions?
Recent history — from the tsunami that hit Japan last year to this spring’s explosion at the Evonik factory in Marl, North Rhine-Westphalia, which slowed automative manufacturers by dramatically cut supplies of a chemical used in car brake and fuel lines — suggests not.
There are indicators that risk management is becoming more of a concern for companies. For instance, technology manufacturing jobs have been leaving the Asian Pacific and returning to the US for three years now, largely due to natural disasters that caused shipping problems and critical supply shortages for the sector.
For companies, it’s a delicate balance of avoiding overstock and storage costs with the potential for downtime in manufacturing plants and lost sales. In the past decade or so, companies have steered toward lean manufacturing practices, where supply chain managers tried to keep supply delivery and manufacturing demand as closely aligned as possible. The problem is, what looks like smart planning during normal operations can turn into poor planning if there’s a supply chain disruption.
“In lean practices, if you plan to manufacture 100 cars, you have 100 parts for that day,” said Navdeep Sidhu, an integration supply chain expert and the director of B2B Product Marketing at Software AG. “So what happens is, when the storm hits, your supplier is in the water, they can’t ship you anything.”
Just like those people who are the last to pick up supplies before the storm hits, there are still supply chain managers that realize the costs of disruptions, but put off dealing with the problem for one reason or another. One UK survey by the the insurance company Zurich found that supply chain disruptions had cost mid-corporate UK businesses £200,000 ($311,320 or 198,5972 yuan) over the past 12 months to supply chain disruptions. The same survey found manufacturers lost even more, at an average of £228,000 ($435,848 or 278,0361 yuan).
Despite this, 55 percent admitted they had not reviewed relationships with suppliers in the past six months because “it’s too expensive” or “they’re too busy.” The good news is that 68 percent said they’ll take a greater interest in reviewing supply chain risks over the next year.
Even supply chains with some built-in redundancies can be at risk, as Apple learned when a second supplier proved unable to offer volume production on the iPhone screens by launch day. In fact, the entire technology device industry now faces a shortage of the touch-screen materials after a recent explosion at one chemical plant in Japan — revealing, once again, that an entire supply chain can be put at risk by a disaster at one company.
Clearly, it’s time to rethink risk management. Here are the four realities of modern supply chain management:
Natural disasters may be the least of your worries. While natural disasters dominate the headlines, they actually account for only 45 percent of supply chain problems, at least in the UK, according to Zurich’s survey, “The Weakest Link: UK PLC’s Supply Chain.”. Problems related to product quality, unplanned IT outages, system failures, supplier insolvency and political unrest or uncertainty all are pressing concerns for supply chain managers. That means it’s not always enough to do contingency planning for the physical supplies. You need to ensure your IT team has built-in redundancy for your technology systems.
You may also want to renegotiate with suppliers to include their risk mitigation plans or add service level agreements that show they can address other disruptions.
Sidhu recommends you also identify back-up suppliers. Move ahead with on-boarding those suppliers into your systems and test the connections so management issues won’t slow down production if your primary supplier should close.
Think about recovery, as well as the short-term impact. Maplecroft, a risk intelligence research firm, ranks the countries with the most exposure to natural disasters each year in its Natural Hazards Risk Atlas. While China, Japan and the US had the highest economic exposure to economic risk, Maplecroft actually ranked 10 other countries as greater risk based on their inability to quickly recover from a natural disaster.
”Bangladesh, the Philippines, Myanmar, India and Viet Nam are among the ten countries with the greatest proportion of their economic output exposed to natural hazards. In addition, they also demonstrate poor capability to recover from a significant event exposing investments in those countries to risk of supply chain and market disruptions,” Maplecroft wrote. “This could lead to sizable business interruption costs, in addition to material damage to essential infrastructure.” Because these countries can’t respond well to disasters, Maplecroft’s research also suggested an event could exacerbate other risks like societal unrest, food security, corruption and rule of law.
Focus on redundancy, rather than “just in time,” for supplies and components. There are several ways to ensure manufacturing and restocking continues despite disruptions. One option is to hold more stock: Apple, for instance, buys in bulk from dedicated suppliers, essentially owning parts of its supply chain. That way, if there is a disruption, the company has a cushion and sometimes a monopoly on the supply. If holding stock isn’t your cup of tea, then find two suppliers, in different regions, for everything you buy. The federal government’s procurement process takes this so seriously, it forced Intel to share it’s chip technology with AMD so there would be a second supplier, thus ensuring redundancy.
Shift from “disaster recovery” to building a resilient supply chain. All of this boils down to one, key shift: Focus on resiliency. Martin Christopher and Helen Peck of the Cranfield School of Management first identified the need for a resilient supply chain in 2004, but some companies still haven’t gotten the memo. Their paper explains the characteristics of a resilient supply chain, as well as steps companies can take to achieve it, but the important message for executives is you need to shift away from simple thinking about the values of lean manufacturing:
“… if resilience is to be taken seriously, surplus capacity may well be the lesser evil, being more flexible than inventory, which may already be committed to its final form or destination. Both capacity and inventory can provide ‘slack’ in a supply chain to enable surge effects to be coped with.”
In a global supply chain, where suppliers are often delivering highly specialized and niche goods from disperse regions, risk management takes on new business significance. It could literally make or break earnings. It’s no longer enough to be prepared, according to a recent panel discussion at the Council of Supply Chain Management Professionals’ Annual Global Conference. DC Velocity covered the event, summing it up with this telling-quote from Sandra G. Carson, vice president of enterprise risk management and compliance at Sysco:
“You’ve got to be willing to take criticism for being overprepared, because there is no defense for being underprepared.”