In a previous article, I discussed the value of having one
supplier for a particular part; how sharing information can make both the
supplier and the customer more profitable. Many companies have undergone the
process of reducing the number of suppliers and relying on partnerships with
their suppliers. But that partnership is
not without risk. Outsourcing has become common place and can add to the profit
of the organization in a stable market. However the reliance on an outsourced
module is exacerbated in an unstable market.
Disruptions in the supply chain can have affects beyond the
production floor, or the retail shelf. A
Gartner study showed a disruption in the supply chain affects the financial
viability of the company, resulting in 107% reduction in operating income when
production is halted.
Risks are many but all have an effect on the supply chain,
and then ultimately on the customer. It
could be a natural disaster from weather, to earthquakes, labor strikes, acts
of terrorism, to disease. The earthquake
in Kobe Japan in 1995 caused damage to one of the busiest ports in Asia at the
time. Even today, 15 years later, Kobe
has not recovered its status. The SARS
scare in 2003 affected flights in and out of China. Logistics providers with operations in Asia
said SARS reduced the air cargo capacity, as the number of passenger flights
was reduced. Capacities in ports can
also impact the supply chain. There have
been stories where retailers missed an entire Christmas season when the hot new
product was in a container on a ship in the Pacific Ocean, lined up waiting for
a berth in one of the pacific ports. In
2001 and 2002 tensions between nuclear powers India and Pakistan reached a new
level. Many US companies rely on a labor
force in India. The mere threat of an
armed conflict in the area caused many of the companies with a presence in
India to rethink that strategy. Labor strikes in the production plants are
obvious disruptors of the supply chain.
But so is labor strife among border or customs agents in countries that
seemingly are not in your transportation routes. Similarly, changes in customs rules may hold
up a shipment for long periods of time.
How many shippers have experienced the vagaries of changes in Brazilian
importation rules?
The effect this has on the organization is to increase their
buffer stocks, which is counter to the strategy to outsource and minimize
inventory risk and exposure. Extended
lead time affect the customer as I have discussed earlier, by either postponing
the purchase to buying the competitors.
Do businesses calculate supply risk? Let’s define supply risk as
Risk = probably of
disruption X the impact
How can a business determine the risk of disruption and the
impact? A though review of the supply
risk, the demand risk, the process risk, control risk, environmental risk, and
the social risk. Even operations under
the control of the business can disrupt the supply chain. There is a famous story of a candy company
that missed almost all their shipments prior to Halloween when their new ERP
systems did not work and the orders were not recognized. Every risk needs to be analyzed and a worst
case scenario developed as well as a plan for crisis management.
The path to reduction of supply chain risk is simple to
explain, but not so easy to implement.
Understand the supply chain Improve the supply chain Identify critical paths Manage critical paths Improve network
visibility Establish a
supply chain continuity team
Partner with suppliers, customers and stakeholders
Most businesses look
at only the cost of production of an item, not the cost of transporting that
item. Therefore it is even more
difficult to account for the crisis management contingency. But the risk assessment will quantify the
risk and the cost so the value is known.
I welcome your comments.
