Smart companies build risk management into their day-to-day supply-chain management processes and prepare contingency plans.
Triggered by Japan's natural disaster, skyrocketing oil prices, tornadoes, floods and other global upheavals, companies are gauging the resilience of their supply chains. They're determining what processes and technologies to employ to mitigate disruptions in the flow of essential supplies when an unplanned event erupts.
This type of risk-management assessment is essential today. Much is at stake, simply in terms of the millions of dollars -- and often much more -- that flows through the supply chain. You then have the impact on long-term competitiveness through a failure to deliver, or the potential damage to brand reputation from if you fail to launch a product on time or if you end up with a product recall from a material defect.
A natural disaster or major geopolitical event can stir up major headaches for supply-chain directors. But, companies should consider other, much more mundane factors and re-examine their game plan for dealing with such disruptions rather than adopting a "We'll deal with it when it happens," mentality.
Looking Beyond a Natural Disaster
Here's a case in point. In 2005, when Hurricane Katrina devastated New Orleans and the southeast coast, it proved a disaster for Lagasse Inc., a wholesale distributor, and, specifically, its call center, distribution facilities and employees and their families. In supply-chain terms, however, the hurricane had minimal impact. Lagasse didn't record any system downtime, lost less than three percent of network capacity for a few weeks and, reflecting the cleaning products it distributes, actually recorded some of its highest sales in the weeks that followed.
Lagasse had carefully prepared for a possible hurricane and was ready to take actions that included the rapid rerouting of supply from other U.S. distribution centers, switching to common carriage from owned transport and anticipating spikes in demand for certain product lines with the ability to switch supply sources quickly.
Many companies like Lagasse accept that risks -- both predictable and unpredictable -- are a natural part of operating a business. They build risk management into their day-to-day supply-chain management processes and prepare contingency plans they can employ immediately when necessary.
And what events had a much greater long-term impact on Lagasse's supply chain than the hurricane? They were all entirely predictable and largely within its control, including:
- Rapid growth, year over year for more than eight years
- Expanding and opening new facilities
- Massive increase and churn in product range
- Adding new, large customers
- Substantial changes in the supplier base
- Changing or implementing IT systems
So how do you build a chaos-tolerant supply chain?
Savvy supply-chain chiefs who strengthen the agility and resilience of their supply channels first answer several key questions, which include:
- Have the key sources of risk been identified and their impact assessed?
- Have we built a supply chain that can absorb the disruptions?
- Is risk management viewed as a one-off exercise, initiated after an unexpected event occurs, or are employees actively building risk mitigation into their everyday activities?
They also develop a plan that can be turned into a competitive weapon allowing them to take an unplanned event and turn it into an opportunity. Here are some strategies for doing just that:
- Develop networks that endure potential upheavals.
- Software tools and other technologies are available to analyze the sources of risk for your company. In the process, they can help determine where and when to make, buy, store, and move products through your networks. These tools help to evaluate different sourcing, production, transportation and inventory strategies to match changes in the business environment, such as the impact of supply disruption, single sourcing versus dual sourcing and alternate parts, for example. Companies can then make use of their assets most effectively, trim costs, reduce inventory levels, and improve customer service.
- Employ advanced supply-chain tools to assess all risks.
Companies should construct various what-if situations and test them extensively.
For instance, determine how the company would cope with, say, a three-month disruption in supply of a critical part or product. You can assess where you can obtain supplies from different vendors, and at what cost. You can figure out how much the changes could affect costs and profits and customer deliveries. These and other real-life scenarios can be tested in advance allowing you to make contingency plans.
Establish a companywide business process that takes risk into account.
Ensure the process assesses the risks and the impact to your supply chain. Involving your sales, operations and financial units in this strategic planning process will help identify and flesh out the issues. Using a comprehensive sales and operations planning process involves more than simply demand-supply balancing because it takes into consideration alternative demand-supply situations as well as their effect on profit margins and sales.
Include risk identification into your operations.
Managers should recognize what potential sources of risk could impact their part of the business and identify new ones that emerge. Risk management should be as pervasive as your quality management or your sustainability strategy. Otherwise, the assessment of risk will fail to deal with those sources of risk where the impact may prove the highest.
Developing sound risk-mitigation strategies will help you build an agile supply chain.
These strategies can deliver a huge competitive benefit and greatly diminish your supply chain risk. You should consider all the potential sources of risk to a supply chain and what to do should an unplanned event occur is no easy task. But, it's the only way to mitigate risk proactively rather than after the fact. And today's software tools and other technology make the evaluation and execution process much easier.
