How resilient is your supply chain? It may not be as secure as you think. Almost all of the Fortune 1000 companies reported supply chain disruptions. According to Fortune, 94% of the companies on their list have issues, smaller of them have less than 30 days of supplies. The supply chain is not just an issue for manufacturers; the supply chain behind your neighborhood hardware store stretches across the world.
As the world becomes more complex, consequently, the risk of disruption due to failure anywhere along the supply chain grows.
Beyond customer loss, a factory shutdown has long-term implications. A company can quickly stop production; however, restarting means re-engaging the entire supply chain and getting it to work again on all the necessary components. Suppliers are likely to shift attention elsewhere to keep their revenue streams alive.
All supply chain sectors are vulnerable to natural disasters and the loss of critical resources such as people and power.
Transportation services may seem less vulnerable to catastrophic loss due to a natural disaster. Still, the loss of labor and damaged infrastructure will cripple transportation.
The Supply chain is a maze of actors. Whether it is third party suppliers, distribution, shipping, and logistics, if one part of the chin fails, the system fails.
To manage the risks in the supply chain it involves working with each player in the system. You must monitor the supply chain on a continual base, and all parties must execute plans.
The lessons that we are learning due to the global lockdown caused by the spread of the COVID-19 virus are huge. Supply chain resiliency to disruption is critical to avoid market collapses and the continued flow of goods and services.
Assess the continuity risk related to the supply chain.
In the middle of a crisis, it is challenging to ensure that your organization has ample supplies. Because of the global economy, supply chain risk assessment must be part of the business continuity planned effort.
These recent major supply disruptions, due to the pandemic, highlights why you have to develop business continuity plans (BCPs) who your primary suppliers and secondary suppliers are. An organization needs to identify and contract with vendors and alternate suppliers before an incident. A company must position its self to pivot quickly and successfully respond to unforeseen disruptions.
The United States has seen manufacturing sent offshore because Low-cost global sourcing has become a competitive necessity for most businesses.
Additionally Global sourcing has increased continuity risk by increasing the overall level of complexity. As a result increasing the likelihood of disruptions caused by specific threats such as terrorism or changes in the regulatory or political landscape.
The complexity of the global supply chain
The complexity of the global supply chain complicates and delays recovery efforts. According to Transformer Technology, 85 percent of new utility transformer orders are manufactured overseas. In a 2017 DOC report, only one U.S. manufacturer produced the special-grade electrical steel required for transformer cores. This could put the entire North American grid at risk. It can take up to two years for a transform to be built and shipped to the United States.
The global supply chain is not only an issue for physical goods. Standard outsourced Information and Technology functions are web hosting, data center operations, or application development. Other Outsourced supply chain functions include transportation, manufacturing, and logistics.
The economic decision for outsourcing is a proven method for cost reduction and quality improvement; it adds to the supply chain’s complexity.
Outsourcing reduces the visibility and awareness of risks. Without proper management, outsourcing hinders response and disaster recovery efforts.
One of the issues with the current LEAN management processes is reducing costs by minimizing inventory handling and storage and optimizing manufacturing, distribution, and transportation.
LEAN management has succeeded; it has made the supply chain more sensitive to supply disruptions. With the LEAN system, there is no tolerance for error and interruptions. Consequently several pandemics have resulted in the most common supply chain management problem known as the bullwhip effect.
As more integration is achieved between different companies’ supply chain processes, the impact of a supply chain disruption is likely to become more significant for all parties.
Managing Risks in the Supply Chain
The multiple uncertainties for an organization’ Supply Chain need to be understood for their potential severity, the effort, and the cost required to mitigate the effects.
Supply Chains Risk Management is defined as ‘The structured identification and assessment of uncertainties that provide potential risks within an organization’s supply chains and develop mitigation approaches to avoid or minimize the consequences.’
Managing Risks is insurance for future events; therefore, it is preferable to anticipate potential risks rather than overcome unexpected challenges when they occur. However, the most significant risk is that an organization remains reactive. As we discussed earlier, you must invest in the processes, techniques, and technologies to protect against anticipated threats in an organization’s Supply Chain is not a significant cost saving.
The risks to the supply chains differ depending on industry and geography. However, there is a systems approach to structuring risks. First, classify potential risks; second, place the risks in identifiable categories.
Let’s explore the external risks. Nassim Nicholas Taleb, in his book The Black Swan: The Impact of the Highly Improbable, explores how the unknow, unknows impact the world. Events such as 9/11, natural disasters, and yes, the pandemic could be examples of these events. In Michele Wucker’s “The Gray Rhino: How to Recognize and Act on the Obvious Dangers We Ignore” argues that there are more know risks that we can plan for, and yes, this includes the pandemic.
Examples of external risks that may look like a “Black Swan” that we can argue is a Gray Rhino are:
- Geopolitical risks:
- Economic and Market risks
- Supply network risks
- Environmental risks
As we explore Geopolitical events, we specific need to look at Geo-economics. Trans-National Corporations and their Global supply Chains are now facing multiple types of geopolitical risks. The first type of geopolitical risk is networks, which organize “functionally fragmented and geographically dispersed production processes”; the second risk is geo-economics of the decentralized globalization and the interdependencies among nations involved in the Global Supply Chain.
PriceWaterhouseCoopers (PWC) reports that 90% of world trade flows through 39 gateway regions and involve global logistic hubs and chokepoints.
The landscape of the global supply chain is bound to geographic realities that define geopolitical-risk. Large shipments of cargo flow out of Geopolitical gateway nations such as China, India, Hong Kong, and Vietnam. These are areas that make them vital to global supply chains and particularly sensitive to disruptions. The vital shipping lanes in the China Seas and the Indian Ocean are a cause of political tensions. Other geopolitical logistic hubs (e.g., Singapore and the Hong Kong-Shenzhen freight cluster) are vital to processing trade flows. Geopolitical chokepoints are critical for trade security, such as the Suez Canal, the Panama Canal, the Strait of Malacca, and the Strait of Hormuz.
Moving manufacturing overseas to save money in the short run sounds excellent for companies. However, with traditional geopolitical risks, such as regional conflicts, sectarian violence, piracy, terrorism, and cyber-treats, have devastating impacts on the GSC.
As the world sends its money to these geopolitical regions, new critical players emerge on the stage. New geo-economic alliances are being formed, and some of these new powers test the waters of their newfound power. Several TNCs from emerging countries are entering the global marketplace, establishing their global supply chains and, as a consequence, redefining the world map of geo-economic players. Geo-economic strategies of emerging powers are facilitating that process.
Economic and Market risks
Economic vulnerabilities reflect a diverse set of global challenges facing companies. The impacts of an economic slowdown or a political upheaval have a direct effect on the supply chain. The price of currency and its fluctuations, instability in demand and prices, inflationary pressures, and unpredictable labor costs make it impossible for firms to accurately plan their investment in foreign markets.
Supply network risks
The supply network is a critical component of the supply chain for business operations. Organizations are trusting outside parties to accurately communicate issues, ship goods in a timely manner, and fix complex problems on the fly. In some cases, overseas suppliers close their business without notice and little recourse for the companies that are doing business with them.
External environmental risks such as natural disasters make up the majority of the environmental risks the organizations face. Natual risks impact shipping, power, labor, communication, and travel in and out of supplying countries.
Internal environmental hazards included health and safety issues, hazmat spills, fire, critical equipment failures, and goods management procedures. Internal hazards can result in the shutdown of the manufacturing plant and the closing of shipping and warehousing facilities. An example of an internal environmental hazard that has impacted the global supply chain is the explosion in Beruit, Lebanon.
Natural hazards may be “Black Swan” events, recovery and continuity plans should be developed. In addition established guidelines and expectations that address these threats. It is essential for your supplier to have these documents and clarly undersand them. A good communication systems must be established and used on a regular bases.
A fair planning process for supply chain continuity begins with asking the right questions. A reliable supply chain continuity capability ultimately relies on robust, well-chosen, and well-managed business partnerships with an environment that enables management and staff from all organizations to roll up their sleeves and work together during a crisis.
A robust continuity program’s benefits include stronger partnerships overall and more significant potential for business success in the future.