Mitigating Supply Chain Risk Through Improved Confidence

Today’s marketplace is characterised by turbulence and uncertainty. Market turbulence has tended to increase for a number of reasons. Demand in almost every industrial sector seems to be more volatile than was the case in the past. Product and technology life-cycles have shortened significantly and competitive product introductions make life-cycle demand difficult to predict. At the same time the vulnerability of supply chains to disturbance or disruption has increased. It is not only the effect of external events such as wars, strikes or terrorist attacks, but also the impact of changes in business strategy. Many companies have experienced a change in their supply chain risk profile as a result of changes in their business models, for example the adoption of ‘lean’ practices, the move to outsourcing and a general tendency to reduce the size of the supplier base. This paper suggests that one key element in any strategy designed to mitigate supply chain risk is improved ‘end-to-end’ visibility. It is argued that supply chain ‘confidence’ will increase in proportion to the quality of supply chain information. Managing supply chains in today’s competitive world is increasingly challenging. The greater the uncertainties in supply and demand, globalisation of the market, shorter and shorter product and technology life cycles, and the increased use of manufacturing, distribution and logistics partners resulting in complex international supply network relationships, have led to higher exposure to risks in the supply chain (Christopher et.al., 2002). Supply chain risks come in many different forms (Harland & Brenchley, 2001). First, the financial risks can be huge. Inventory costs due to obsolescence, markdowns and stock-outs, can be significant. Personal computers devalue by more than one percent per week. In the USA retail markdowns constitute about 20% of total retail volumes. Mismanaged supply chains, leading to excessive or mismatched inventory, are thus liable to huge financial risks. Financial risks can also present themselves through the risk of reworking stock and penalties for non-delivery of goods. The complexity and uncertainty within a supply chain can also increase the “chaos” risks within the supply chain. These chaos effects result from overDeleted: ri International Journal of Physical Distribution & Logistics Management, 2004 4 reactions, unnecessary interventions, second guessing, mistrust, and distorted information throughout a supply chain (Childerhouse, et.al, 2003). The well-known “bullwhip” effect (Lee, et.al., 1997), which describes increasing fluctuations of order patterns from downstream to upstream supply chains, is an example of such chaos. Deming called this “nervousness.” This increased nervousness will of course lead to higher costs and inefficiencies through over-ordering and ‘squirreling’ of inventory. In addition, there are many unexpected and unpredictable disruptions that add to the risks of a supply chain. The closure of the US air space after the terrorist event of September 11, 2001; the longshoremen strike in California in 2002, and the outbreak of SARS in 2003, are examples of events that paralysed supply chain flows. The impacts of such disruptions can be catastrophic. The existence of nervousness and chaos in a supply chain also means that it is difficult to make optimal decisions at each stage in the supply chain. The risks of making the wrong or ineffective decisions, or decision risks, become the inevitable consequence. Thus, for example, it will not be possible to design optimal production schedules if there is uncertainty as to when materials or components will be available. Ultimately, the supply chain is exposed to market risks, i.e., missing the market opportunities that may exist. A supply chain cannot be responsive to changing market trends and customer preferences if the right market signals cannot be recognised. For example, a supply chain cannot support a new product launch if it is unable to change production or supplies to meet demand. Finally, market opportunities can be missed when customer orders with short lead times cannot be met. International Journal of Physical Distribution & Logistics Management, 2004 5 A supply chain with high risk exposure cannot be efficient. A manager running a supply chain with these risks lacks confidence in the supply chain. Table I shows some of the many ways in which supply chain confidence can be impacted. Table 1 : Lack of Supply Chain Confidence