Today’s global supply chains are leaner and more dispersed than ever before, leaving them extremely vulnerable to operational risks and unpredictable disasters, both manmade and natural. Developing an effective risk mitigation strategy against these inevitable threats is paramount to success in the global marketplace.
The idea of supply chain risk mitigation is relatively new, but important nonetheless. Events of the not too distant past, like the Philips semiconductor lightning fire in 2000 that damaged their stock of millions of computer chips, highlight the need to be prudent when addressing supply chain risk.
From our perspective, there are five main strategies that supply chain managers can leverage to combat a disruptive event:
- Stockpile Inventory
- Diversify the Supply Base
- Develop Backup Suppliers
- Manage Product Demand
- Strengthen the Core Supply Chain
Using one, or a combination, of these strategies to implement maximum supply chain protection for an organization is critical to obtaining a strategic advantage amongst the competition and for facilitating long-term profitability.
The idea of using inventory to manage supply chain disruptions is a simple one: maintain an inventory level of critical components or finished products higher than operationally necessary to provide a buffer against potential disruptions. However, stockpiled inventory is not a one-size-fits-all solution and many pitfalls may be encountered.
The size of the stockpile must be carefully balanced with the anticipated event frequency and duration. A frequent event with a short duration, such as a machine failure, can easily be managed by carrying a slightly higher level of inventory, but counteracting the effects of a rare event with a long duration can be challenging, given the costs of holding high levels of inventory.
When utilizing this method, it’s important to consider the inventory location and replenishment strategy; the inventory stockpile must be located and stored in a manner that isolates it from the risk it’s counteracting. Similarly, during and after a disruption, a thought-out procedure must be in place to replenish the stockpile so the business is not exposed to other risk events while recovering.
Diversify the Supply Base
Dividing up sourcing activities between multiple suppliers serves to protect a business against supply disruptions from a single supplier by ramping up sourced volume from a possibly unaffected supplier. As with any strategy though, there are costs associated with it.
By engaging multiple suppliers, in different locations (possibly to mitigate geographic impacts), economies of scale can be greatly reduced, driving up fiscal cost. Like a stockpile of inventory, this cost needs to be balanced with the value of the disruption impact.
Another important factor to consider is Network Configuration – how a given supply chain is designed or mapped out, taking into account things like tax regulations, availability of resources, and transportation flow. For instance, at one extreme a company might have a single source for each product manufactured, at the other extreme they might have duplicate supply sources for each product and sub-product, and somewhere in the middle they may have multiple suppliers provide different levels of supply for various product lines. In all cases, it’s important to review any possible shared supplier impacts from a single failure, and to develop strategies for maintaining consistent quality between shared suppliers.
Develop Backup Suppliers
Another great strategy to protect against a supply chain failure is developing a backup supply. The idea is that a company identifies an acceptable supplier and enters into an agreement to reserve production capacity for a potential need during a disruption. This is like a diversified supply strategy, but different in one key aspect: it’s cheaper. This is because cost is only incurred when the supply source is engaged during the disruption event.
When leveraging a diversified supply chain, the company must absorb the costs associated with maintaining multiple supply sources, even when a disruption risk may not be present.
Manage Product Demand
If implementing strategies on the supply side of the equation is too difficult or costly, an alternative approach is available: manage the demand. The two main sub-strategies here are Switching and Rationing.
While using the Switching strategy, a company with multiple products can take steps to encourage customers to purchase a product that’s not supply constrained, instead of a product that is. This can be achieved through temporary discounts or other incentive strategies.
Under a Rationing strategy, the company takes steps to distribute its limited supply to the most important customers first. The idea being to make the customers who significantly impact your future as a company happy. Of course, the most important customers will vary by the goals of the company, but it’s critical to identify them and ensure their supply is undisturbed.
Strengthen the Core Supply Chain
The previous strategies all provide methods and safeties against the impacts of a disruption, but another key method is to take steps to improve the core of one’s supply chain. This can be done by stress testing the operations and conducting scenario planning to practice responding to many potential disruptions. When a company does this effectively, it allows them to identify and eliminate weaknesses found in their current operations in a controlled environment; whereas during a live disruption, if this is handled poorly, it could result in catastrophic failure the company may never recover from.
Companies must carefully consider the five supply chain disruption strategies mentioned above when developing risk management plans for global supply chains; no single strategy can prevent or minimize all of the potential disruptions that today’s organizations may face. A company should carefully consider an approach that utilizes multiple strategies acting in concert to thwart these disruptions. When done effectively, employing supply chain risk mitigation strategies can be a true competitive advantage in the contemporary global marketplace, and companies who excel at it will enjoy supply chain security and long-term sustainability for years to come.