A Better Way to Manage Supply-Chain Risk

Although major problems facing manufacturers are often self-evident, that is not always the case. For instance, trouble based on events deep in the supply chain may disrupt production plans and result in exorbitant and unexpected costs.

This is not strictly limited to catastrophic events such as hurricanes, floods or even terrorist attacks. Other more routine factors are the ones that usually come into play. Consider technology glitches, inaccurate forecasting and, surprisingly enough, the rather simple factor of poor supplier performance as a few of the major culprits.

In fact, these seemingly mundane events rooted in the supply chain occur more frequently than the worst catastrophes imagined. That makes them greater threats to the financial health of the manufacturing company.

Moreover, businesses face new challenges as they globalize. As supply chains begin to stretch around the world, the impact of lead times and supplier performance increases in magnitude. Strategies like lean manufacturing may result in inventory levels that put companies at risk. In response, some companies operating global supply chains might boost stock levels as a form of protection. This approach, in turn, could negate cost savings arising from adopting a global model.

One possible alternative is to build greater flexibility into the supply chain. Several suggestions for improving the process include:

• designing products in modular fashion, with components that can be sourced from a number of suppliers;
• establishing processes and adopting tools that could lead to early detection; and
• using the proper software to help manage the kind of routine supply-chain risks that are generally easy to control.

Risks such as natural disasters or military conflicts are more difficult to predict and assess. It is not generally known how they will affect the supply chain. Conversely, manufacturers may rely on available data for better-known risks like supplier performance, forecasting accuracy and faulty supply-chain execution.

Most of that day-to-day operational data can be found in a company’s existing systems. By simply loading the data into an optimization software tool, management can create models that indicate when a supply chain is significantly at risk. A manufacturing operation that is able to manage the risk of the mundane will be prepared to respond properly when a major catastrophe occurs.

Practical approach: An effective means for addressing supply-chain risk is for stakeholders throughout the supply chain to work together to identify potential risks as well as proposing creative solutions. The most effective strategy for a risk deep within a supply chain might not even involve that particular supplier. These alternatives should be carefully studied by the advisory team to select the best course of action for a particular firm.

December 2007