Avoid Supply Chain Risk
Learn how your company can predict and reduce the impact of disruptions to the supply chain.
By Rob Handfield
Today, low-cost sourcing is a standard, competitive strategy in many industry sectors. As organizations source increasing proportions of manufactured products from low-cost countries, they often do not consider the hidden perils of these approaches, especially the risk they present to the enterprise. Read on to learn how your company can predict and reduce the impact of disruptions to the supply chain.
Supply chain disruptions are unplanned and unanticipated events that disrupt the normal flow of goods and materials within a supply chain and, as a consequence, expose firms within the supply chain to operational and financial risks.
The 2002 longshoreman union strike at a port on the West Coast of the US, for example, interrupted transshipments and deliveries to many US-based firms, and port operations and schedules did not return to normal until six months after the strike had ended. Likewise, the lightning bolt that, in March 2000, struck a Philips semiconductor plant in Albuquerque, New Mexico, created a 10-minute blaze that contaminated millions of chips and subsequently delayed deliveries to its two largest customers: Finland’s Nokia and Sweden’s Ericsson.
The inconvenience to firms expecting to ship or receive goods and materials is, however, not the entire story; disruptive events within a supply chain can also significantly hurt the financial bottom line for affected entities in the supply chain. Publicly traded firms experiencing supply chain disruptions, for example, have reported negative stock market reactions to announcements of such disruptive events, and the magnitude of the decline in market capitalization has been as large as 10 percent. As a matter of fact, Ericsson reported a $400 million loss because it did not receive chip deliveries from the Philips plant in a timely manner.
Although the true costs of any supply chain disruption can be difficult to quantify precisely, at least one firm has estimated that the daily cost impact of a disruption in its supply network was between $50 million and $100 million.
Because a supply chain disruption can potentially be so harmful and costly, there has been, not surprisingly, a recent surge in interest and publications – from academics and practitioners alike – about supply chain disruptions and related issues. Besides classifying supply chain risks into different categories (two of which are disruptions and delays), recent research identifies drivers of these different risk categories, and explains how risk mitigation strategies might reduce one type of risk but at the same time increase another type of risk.
Extant research, therefore, not only confirms the costly nature of supply chain disruptions but also provides insights pertaining to such related issues as supply chain risks, vulnerability, resilience and business continuity planning. Yet one issue remains relatively unexplored: How and why would one supply chain disruption be more severe than another?
Formally, the severity of a supply chain disruption can be defined as the number of entities (or nodes) within a supply network whose ability to ship and/or receive goods and materials (i.e., outbound and inbound flow) has been hampered by an unplanned, unanticipated event. A more severe supply chain disruption would, therefore, have a more far-reaching and financially devastating impact on a supply network than one that is relatively less severe. All supply chains have risk to some extent, but the variability of risk is a function of multiple factors, including the density, criticality and node density of the supply chain.
Our recent research argues de facto that supply chain disruptions are unavoidable and, as a consequence, that all supply chains are inherently risky. Firms need to identify factors that must be considered when making decisions about whether to enact or implement specific operational and supply chain policies, practices and initiatives. Then, companies can avoid those policies, practices and initiatives that would inherently bolster the presence of factors contributing to the severity of a supply chain disruption; at the same time, firms can pursue those that would lessen the severity of a supply chain disruption.
Most importantly, there is a need to identify and develop metrics associated with supply risk that identify the operational risks involved in managing the supply base. SAS has developed a number of sophisticated supply risk management tools and is fostering a partnership with Supply Chain Redesign LLC. The results of these risk metric systems, which have been piloted at leading companies, have been shown to effectively predict supply chain disruptions, and enable risk mitigation and contingency planning approaches. These are important elements for improving and reducing the impact of supply risk.
Bio:
Rob Handfield is the Bank of America Distinguished Professor of Supply Chain Management at North Carolina State University.
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