Can Your Global Supply Chain Withstand a Crisis?
Natural disasters, fluctuating oil prices, and other global factors continue to disrupt the flow of essential equipment and goods for manufacturers worldwide. For many companies, it has triggered a critical question: Can our organization's supply chain withstand a major upheaval?
It is an important question, because the flow of money through a supply channel determines a company's financial success. Any disruption can seriously damage a company's long-term competitiveness simply from the failure to get goods and deliver on its promises. Just consider the effects of the April 2010 volcanic eruption in Iceland that shut down airspace across northern Europe for six days. It interrupted the flow of airfreight tremendously for several weeks, to the financial detriment of thousands of firms large and small—and could do it again this year.
But natural disasters aren't the only cause for concern. Recent fluctuations in oil and other commodity prices are playing havoc with many companies' ability to assess the short- and long-term effects of changes in prices on their supply chains. And geopolitical turmoil, such as that in the Mideast, has a similar impact on many businesses.
Yet supply-chain managers often don't consider the possibility of a natural disaster occurring, or its impact. A survey of executives found that the source of risk most worrisome was supplier failure, followed by manufacturing disruption, logistics failure, and IT failure—all of which can be planned for. Natural disaster came in last—even though the typical results of a natural disaster are supplier disruption, or manufacturing disruption, and logistics failure.
Planning for Chaos
So, how do organizations assess their vulnerabilities and build supply chains that can tolerate chaos? The short answer: Companies must first develop a comprehensive risk-mitigation plan to be able to build agility and resilience into their supply chains. And, experienced logistics chiefs suggest that some key questions must be answered initially, including:
- What are the greatest risks to our organization, and what impact could they have? For many companies, the increasingly global nature of supply chains is that major concern. Longer supply lines can spark a greater potential for delays, and also pinch capacity in vulnerable spots.
- Have we built a supply chain that can absorb disruptions? Developing scenarios and testing them can help answer this important question. It's relatively easy to model the various elements of a supply chain and examine the potential impact of events, then develop plans to minimize damaging effects.
- What alternate supply sources or transportation options exist? This is where developing scenarios can be beneficial. What is the difference between single sourcing and dual sourcing? What are the differences between different modes of transportation or different carriers? These are critical questions that can be modeled. Companies can have plans in place before these types of events occur.
- Do we view risk management as an exercise initiated only after an unexpected event occurs, or are employees actively building risk mitigation into their everyday activities? If it's the latter, they likely are devising management dashboards that help identify trends using a collection of key performance indicators. These dashboards display early warnings if suppliers or transportation providers begin underperforming. They also can signal when networks start to operate outside pre-established tolerances.
These questions—and the answers to them—can help companies build resilience and agility into their supply processes. Increasingly, new software tools and technology are available that help supply chain professionals build strong supply chain management networks. This makes the actual process of monitoring risks much easier. These advances permit companies to determine where and when to buy, make, store, and move products through their networks.
They also help users evaluate different sourcing, production, inventory, and transportation strategies to keep pace with changes in the business environment. This way, companies can use their assets most effectively, decrease costs, reduce inventory levels, and improve customer service.
Advanced supply chain tools help companies make a complete risk assessment of their supply and distribution channels. It allows them, for instance, to examine how their supply chain might handle a compete outage of supply or distribution capacity. They also can test other real-life scenarios.
Risk management is comparable to quality management or a company's sustainability strategy—it must be all-encompassing. It must address the everyday sources of risk, and managers must incorporate the identification of potential risks into their daily practices.