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Spotlight on Supply Chain Risks and Resiliency

Contingency and backup strategies that account for new levels of risk and potential disruption will help managers ride out the storms.

Spring 2011
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"At present, firms are working to repair or rebuild supply chains by, for example, seeking to secure alternative suppliers, including from overseas, and reviewing product specifications. However, as supply chains are complex and interconnected, if a bottleneck occurs in any one part of the chain, accurately gauging its impact and addressing the problem present various difficulties," Nishimura says. "Therefore, a considerable amount of time is considered necessary to reconstruct supply chains."

Those words put the spotlight firmly on the need for a firmer understanding of supply chain risks, risk assessment, and risk management. Japan's events underscore the importance of assessing the risk that manufacturing and distribution companies are taking within their supply chains early on, understanding the tools that can help cope, and implementing those assessments. Obviously, in a complex and long supply chain, risk can be difficult to see; even if one small link is broken, the damage will spread quickly throughout the chain without proper planning and foresight.

Many Japanese auto parts and electronics components are from single-source vendors and are not available elsewhere. In other words, even the smallest single-source widget can cause huge reverberations and delays along the supply chain. If this comes as a surprise after a disaster or interruption occurs, it's too late. Companies are then in scramble mode - and it is hoped that communications and "war room" protocols are in place.

Importance of Resiliency and Backup Sourcing
A major lesson for managers now is to build in resiliency and backup sourcing as part of the contingency planning process. This should include dual and long- or near-shore sources for manufacturing and distribution throughout the chain.

For single-source suppliers, reliance on just-in-time and lean approaches is potentially dangerous and shortsighted. Keeping a week's or even a few months' inventory of vital parts and components from single sources will keep the chain intact during a crisis while production ramps up.

Up to 90 percent of supply chain-contingency planning should comprise dual sourcing. In cases where the chain must rely on a single-source supplier, a different inventory strategy is needed. In an extreme case, such as presented by the disasters in Japan, this could mean an additional six months of storage.

Paying attention to the total landed costs along the entire chain will also help in sourcing, inventory, and contingency planning. Obviously, longer supply chains carry significantly greater risk than short supply chains. Modeling the total landed costs associated with procurement reveals a comprehensive picture of the financial value of various sourcing strategies. This calculation includes not only labor and manufacturing costs, but also transportation, distribution, handling, real estate, duties and taxes, and damage costs. The total landed cost analysis gives managers a clearer picture of the global supply chain, its inherent risks and rewards, and whether to opt for a dual-source and/or near-source strategy.

This analysis can also play a major role in decisions on back-up production and distribution plans (flexible real estate options), substitute parts suppliers, and alternate transportation and inventory strategies. I am aware of one company that has a full real estate and technology "backup" plan in place to get a 400,000-square-foot facility up and running in a matter of weeks if one of their major distribution centers goes down due to a natural disaster. The "site" moves around the country as the landlord rents the space, but a T1 connection also moves to the new building location to ensure instant connectivity to the facility if execution of the plan is initiated.

With the Japan disasters, for the first time, many logistics managers have had to face this type of situation lasting a prolonged period of months rather than days. Disruption, interruption, or whatever you call it, is one of the most significant supply-chain events in modern logistics and outsourcing times.

In that respect, it can - and should - also be a learning experience, by providing the impetus for implementing comprehensive and resilient contingency and backup planning strategies along the supply chain.

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