Mitigating Supply Chain Risks (Adobe Acrobat)

Is your supply chain at risk of failure? Are your existing supply chain strategies increasing that risk? In 1995, an earthquake hit the port town of Kobe Japan, destroying 100,000 buildings and shutting down Japan’s largest port for 26 months. This great disaster forced 1,000s of firms to alter production, distribution, and inventory strategies just to survive. Procter and Gamble and Texas Instruments had to move their headquarters. But the worst part was that four major automotive firms had to halt production of more than 50,000 cars as parts couldn’t make it through the destruction. While this type of failure doesn’t occur everyday, the supply chain strategies that lead to it do. When a firm takes a traditional, cost minimization approach to supply chain strategy, it often increases its risk of failure or increases its overall cost. While traditional supply chain redesign efforts can minimize the cost of supply chain designs and logistics operations, their focus on leveraging economies of scale often yields results that over-concentrate resources. These solutions remain optimal as long as nothing changes, but they are extremely fragile to exceptions, failure, or changes in cost. And since most traditional approaches fail to consider the hidden costs of this over concentration, these best made designs and plans heighten the risk of service failure, increased cost, and capacity imbalance. So how can a firm avoid these catastrophic events? It must manage risks, not ignore them. To balance highest profit strategies against the flexibility and responsiveness required to deal with real-world change, a firm must balance operating costs with supply chain risk. This analytical risk mitigation enables firms to tie risk management into strategic and tactical analyses, thus reducing overall costs, avoiding service disruption, and better balancing capacity and demand. Firms Are Increasing Their Risk Of Supply Chain Failure. Supply chains fail for many reasons. Labor strikes, natural disaster, machine breakdowns, political instability, and last minute customer changes all contribute to supply chain failure. These failures come at different levels of magnitude as does their impact. There are macro failures like the Kobe earthquake. There are tactical failures like the AZF plant explosion in Toulous, France last year that shut down local transportation for weeks or the recent Nor’easter that halted air transportation for days. And finally, operational failures like a carrier break down whose impact is felt at a localized level. But it doesn’t matter the level of failure – nor does it matter whether it was your fault. When your supply chain fails due to a natural disaster or partner’s material delay, your firm will pay dearly. A recent study by Vinod Singhal at Georgia Tech’s DuPree College of Business found that supply chain glitches negatively impacted stock prices by nearly 20%. As a matter of fact, supply chain glitches had more of an impact on stock price than any other corporate event including new product introductions, IT investments, plant closings, and even stock splits. And even more alarming, when supply chain failures were caused by suppliers or customers, the shareholder impact was greater than when internal operations caused the failure. While internal glitches reduce shareholder value by 7%, even more substantial, supplier and customer gaffes reduced it by 8% and 11% respectively. While a firm can’t always anticipate internal failure or supplier glitches, it often increases its exposure to these failures by choosing a cost minimization strategy that drives it to overconcentrate operations in too few suppliers, facilities, or routes. This over concentration causes the firm to be disproportionately impacted by these unexpected events – making it vulnerable to future cost increases and stressing its ability to serve customers effectively. The result? Increased exposure to operational and financial supply chain risks. Each day firms deal with financial uncertainty driven by exogenous factors, including currency, interest rates, and commodity futures. While firms don’t control these rate changes, many firms increase their impact by putting too many eggs in one basket. As a firm puts a higher proportion of its assets into one supply chain element, any major change to a financial metric will more greatly impact overall cost. For example, a company might reconfigure its network by centralizing inventory -a strategy that reduces inventory carrying costs but increases outbound transportation costs. And while this strategy might reduce overall costs, a dramatic swing to cost drivers like interest rates or fuel prices would mean that total costs actually increased more with the new configuration than if the firm had left the network alone. In fact, in the last 24 months alone, interest rates have dropped 63%, while fuel prices have increased 48% in the last 12 months. Without factoring the risk or rate of these changes, any network strategy could actually cost a company millions (Figure 1). Luckily, firms have mechanisms like insurance and financial hedging that can protect them against higher interest or commodity prices. While insurance may reimburse you for buildings When Strategy Was Selected .... However with current costs .... Figure 1: Supply Chain Risk Alters Optimal Strategies Decentralized Centralized Decentralized Centralized