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Every time there is a superstorm or black swan event anywhere in the globe, supply chain professionals are scampering to understand the impact on their supply chain and manufacturing processes to make sure that their product flows, finished goods deliveries, materials replenishments, parts deliveries, fulfillment processes and businesses in general are minimally impacted.
Superstorms, natural disasters and black swan events are a perfect opportunity for smart supply chain strategists to seize and eliminate their supply chain deficiencies. These events magnify what is wrong in the supply chain and should be seen as such; rather than treated as an anomaly.
"Two key elements are essential in risk mitigation are supply chain segmentation and supply chain regionalization"
The notion of supply chain risk is increasingly growing across various industries as studies have begun to show. Risk management came into the limelight given the rise in customer demand volatility.
• Recurrent risks (such as demand fluctuations that managers must deal with in supply chains) required companies to focus on efficiency in improving the way they match supply and demand. They relied on knowing the likelihood of occurrence and the magnitude of impact for every potential event.
• Disruptive risks on the other hand, require companies to build resilience despite additional cost and are often ignored. Companies often end up betting on these low-probabilities, high-impact events and rank them low in their risk factors.
After the Toyota supply chain disruption following the Fukushima earthquake and Tsunami in 2015, weather patterns and natural disasters have become a rising worry. Today supply chain efficiency (directed at improving a company’s financial performance) and supply chain resilience (whose goal is risk reduction) have to go hand in hand.
So, what should supply chain professionals do? How does one go about ensuring Supply Chain Risk Management is incorporated into the overall Supply Chain Strategy?
Step 1: The first step in building a resilient supply chain is to incorporate risk in every supply chain strategy.
Every supply chain strategist has to ask these five questions of their enterprise:
1. How well do we know and measure we supply capabilities?
2. How much visibility and situational awareness do we have in our supply chain?
3. What impact would a major supply disruption have on our enterprise?
4. How much time and money would it take to recover from a disruptive event?
5. What is our holistic risk exposure in the supply chain?
The answers to these questions may not be pretty; but the more we seek them, the more we will strive towards gaining a better understanding of the inherent risks in our supply chain; and the better prepared we will be with risk mitigation strategies.
Step 2: The next step to risk mitigation is gaining "situational awareness". Situational awareness is defined as the ability to receive, process and comprehend supply chain event information in real time with the intent to proactively counter threats and disruptions to product flow in order to minimize the impact to the organization's financial performance. In simple words, ‘knowing what is going on in your supply chain so you can figure out what to do’. An unplanned event that disrupts a supply chain with the capability to quickly detect and disseminate pertinent information pertaining to the disruptive event is less likely to be severe than the same supply chain disruption affecting a supply chain with little or no capability to warn. Shared situational awareness requires information sharing, coordination and collaboration among supply chain partners, and if done properly can significantly improve the recovery capacity of supply chains from disruptions.
Step 3: The third and final step is in devising risk mitigation strategies that balance supply chain risk with agility across the network. These strategies ultimately have to be evaluated against their impact on cost efficiency. There are a variety of risk mitigation strategies. To name just a few:
• Holding sufficient inventory geographically without centralizing it
• Having multiple sourcing strategies and eliminating sole-source
• Keeping backup production facilities and holding enough production capacity
• Ensuring a flexible transportation network to reroute quickly
• Enabling containment and isolation strategies to minimize impact across the entire supply network
Whatever your strategy, two key elements are essential in risk mitigation: supply chain segmentation and supply chain regionalization. The intent has been to contain and isolate the disruption. Needless to say, both these strategies require efficient tools and technologies for information visibility, timely collaboration among supply chain partners and coordinated corrective actions to recover from disruptions.
Are you ready to make your supply chain resilient?