When Disaster Strikes: Avoiding A Hit To Your Supply Chain

Written By Mark Humphlett

The catastrophic earthquake and subsequent tsunami in Japan has produced a ripple effect on global business that reaches far beyond any seismic wave. From natural disasters and political unrest, to turbulent commodity prices, business on a global scale brings never-before-seen risk. The electronic and automotive industries are highly dependent on supplies that come from Japan, and even the most forward-thinking companies, like Apple, have seen supply chain disruptions due to the disaster. To avoid future production setbacks, today’s CEOs have made managing uncertainty a top priority.

At a recent executive summit sponsored by Infor, executives identified the sources of risk they were most concerned about: "supplier failure" was No. 1 followed by "manufacturing disruption," "logistics failure," "IT failure," and "rising fuel and energy costs." The events in Japan had an impact on each of these sources of risk.

Supply-chain directors who may have once seen risk management as something initiated in response to an unexpected event are realizing that to effectively manage risk plans must be in place beforehand. Though disruptions cannot be predicted, plans can be created with proper procedures in place to absorb potential disruptions. Understanding and identifying sources of risk needs to part of employees’ daily activities.

In addition to managing risk, supply-chain directors understand the increasingly important principle of supply-chain agility to ensure they provide protection against the unexpected. A growing number are building resilience into their global supply processes by determining which business procedures and technologies will best equip their organizations to mitigate risk.

Here are some strategies companies can implement to build resilience and agility into their supply processes:

  • Design networks to sustain potential disruptions in the first place. Model  your supply-chain and analyze the sources of risk for your company using available software tools. Technology is available that allows companies to determine where and when to buy, make, store, and move products through their networks. In addition, such tools help you evaluate different sourcing, production, transportation, and inventory strategies to keep pace with changes in the business environment such as the impact of supply disruption; single sourcing versus dual sourcing; alternate parts; etc. As a result, companies can employ their assets most effectively, reduce costs, lower inventory levels, and enhance customer service.
  • Use advanced supply-chain tools for a complete risk assessment. Build different scenarios and model them extensively. For example, examine how your network might cope with a complete outage of supply or distribution capacity, i.e., a 12-week outage in Japan or strike in France. Ask yourself: Can we source products from different regions or suppliers?  At what cost? At what impact to sales? How would profits cope with a 20 percent or more rise in distribution costs due to oil-price hikes? How would it change our distribution and transportation strategies? These and other real-life scenarios can be tested in advance.
  • Develop a solid, institutionalized business process that considers risks. Ensure the process actively considers these risks to your supply chain and assess their impact. A strong sales-and-operations planning process can serve as the foundation for flushing out these issues. Over the past decade, this strategic business-planning process has evolved to something more than just demand-supply balancing. It now considers alternative demand-supply scenarios as well as their impact on revenues and margins.
  • Build risk identification into everyday operations. Managers, learn to visualize and understand what potential sources of risk could impact your department and formalize the identification of these into daily practices. Risk management is like quality management or a sustainability strategy—it needs to be pervasive to be effective. If the assessment of risk is a different function or a separate department, then it will fail to address the everyday sources of risk across the organization—where the evidence suggests impact is highest.
  • Create supply-chain agility. Build your risk mitigation strategies on the principle of supply-chain dexterity. The fashion industry was one of the first to recognize the benefits of agility. The term “fast fashion” describes supply chains that can move items from design to shelf in weeks in response to consumer trends. This strategy provides a massive competitive advantage in meeting demand driven by, say, an unusually wet summer, or bringing to market that suddenly “must-have accessory.” It also significantly reduces supply-chain risk.

Organizations are now recognizing that a well-prepared risk mitigation strategy can be turned into a competitive weapon that enables them to turn an unexpected event into an opportunity, and technology can serve as an effective component of managing this supply-chain uncertainty.  By analyzing critical business data, planning for "what-if" scenarios and putting automated processes in place, companies can manage variability in their supply chains regardless of future uncertainties.

Mark Humphlett leads enterprise resource planning at Infor.



CIO Central is a contributor page dedicated to IT trends and issues that impact business strategy. Areas of coverage include software, hardware, computing and outsourcin...