Prepare for supply chain disruptions before they hit

The U.S. flu season typically peaks between December and March. On October 5, 2004, Chiron (www.chiron.com)—one of only two companies contracted to provide the U.S. healthcare system with flu vaccine for the 2004-2005 season—had its sole vaccine plant in Bristol, U.K., shut down by British health authorities due to contamination. As a result, roughly 50% of the 100 million doses of flu vaccine the U.S. needed were suddenly unavailable.

Rationing, panic and price-gouging promptly ensued. There was no quick solution since the other manufacturer, Aventis-Pasteur (www.sanofipasteur.com), was already operating at 100% capacity and no other manufacturer anywhere in the world had the capability to help.

So what went wrong? Whether they knew it at the time or not, officials had placed the U.S. in a very risky situation with regard to the ongoing supply of flu vaccines. While perhaps not a "sole source" relationship by strict definition, in having a small number of suppliers with practically zero spare capacity to provide coverage for each other, that's precisely what they got. And despite this, neither supplier was closely monitored. If, during the planning process, it was determined that only two suppliers were sufficient, the relationships with those suppliers should have been rock solid; and they should have been monitored early and often.

In other words, if you are going to put all of your eggs in one basket, you'd better keep a close eye on that basket. This applies not only to supplier relationships, but to virtually every level of the supply chain; from raw material sourcing to manufacturing capability to distribution services. Because in today's world of increasingly complex, globally dispersed supply-chains where lean is the mantra, even the slightest disruption can cripple a firm's abilityto get products to market. So it should come as no surprise that supply chain resilience—the ability to absorb disruptions with minimal impact to the business—has become a hot topic for corporate executives.

So how does a firm become resilient? As is often the case, the best place to start is at the source; or in this case, with your supply base. By investing the time and resources to fully understand your firm's exposure to supply disruptions - both the likelihood of a disruption occurring and the operational impact of such an event - it is then possible to determine the optimal portfolio of supply risk mitigation strategies and supply chain planning tools. This article proposes a framework for doing just that.

Mitigating supply risk: A 6-step resiliency framework
While single-sourcing components or services can be advantageous in many regards, it also introduces a significant level of operational risk—as we saw in the case of Chiron. Suppliers can go out of business, lose key employees, be acquired by another company, or suffer major operating disruptions of their own—all very dangerous situations if that supplier provides one or more key components that can bring production to a screeching halt if supply is interrupted. In the cases where it does indeed makes sense for a firm to sole-source a key component, contingency planning must be used to hedge against the disruption risk.

The first step in the planning process is acknowledging that risk. A firm must seek to understand:

  • What are the enterprise's strategically significant raw materials, components, and/or sub-assemblies?
  • Who are those inputs sourced from?
  • How vulnerable is the enterprise to a disruption in supply from those sources? What are the current and desired risk levels?
  • What can and should be done to minimize that supply risk?

To help address these questions, a comprehensive supply risk management program will require that a firm:

1. Identify all critical suppliers of materials or service (carriers, contract manufacturers, 3PLs, etc.):

  • Review product portfolios to identify strategically significant products and/or services.
  • Identify the critical raw materials required to produce those products and/or services.
  • Identify the suppliers of those raw materials or services.

2. Estimate the probability and frequency of a business failure or supply disruption:

  • Develop an appropriate framework to assess disruption probability and frequency.
  • Collect necessary data from public, supplier and internal sources.
  • Evaluate all key suppliers against this common framework.

3. Estimate the potential impact of a supply disruption:

  • Develop an appropriate framework to assess the potential range of disruption impacts to operational capability.
  • Evaluate all key suppliers against this common framework.

4. Evaluate your current business relationship with each critical supplier:

  • Are you making it difficult for the supplier to stay in business?
  • Review the contract for disruption clauses, surge capacity provisions, etc.

5. Identify and implement appropriate risk mitigation strategies:

  • Identify all risk mitigation strategies available to the enterprise.
  • Derive and implement the optimal portfolio of available risk mitigation strategies.

6. Identify, implement and track the appropriate metrics to evaluate the effectiveness of selected supply risk mitigation strategies:

  • Derive the appropriate metrics to evaluate the effectiveness of each strategy.
  • Evaluate program effectiveness against defined criteria on a regular basis.
  • Update the strategy portfolio as needed to drive continuous improvement.

A call to action
In most cases, significant supply crises arise not only because companies elect to sole-source critical components, but also because they lacked the visibility into their suppliers' operations that may have allowed them to anticipate both the likelihood and the eventual impact of the disruption, and develop an appropriate response plan before they needed it. When disaster struck, they simply were not prepared.

Often, the situation could have been prevented by proactively working with partners to understand their respective risk profiles and implement contingency measures to protect themselves. While this certainly assumes a high level of cooperation and trust between supply chain partners, that is exactly what is necessary to achieve true supply chain resiliency. With that in mind, mitigation strategies that most firms have at their disposal include:

  • Establish supplier teams to monitor all critical suppliers on a regular basis.
  • Contract with backup suppliers to hedge risk where feasible and practical.
  • Use range forecasts to drive flexible contract terms with key suppliers.
  • Deploy inventory buffers to strategic locations throughout the supply chain.
  • Build robust supply chain visibility and control capabilities.

In addition to these examples, there are myriad creative ways for companies in every industry to protect themselves from their key suppliers and operating partners. The key lies in planning for failure. Assume that a supplier will fail, then identify the contingency response (or responses) that minimizes the overall impact to your business at the least cost. This can be a difficult and time-consuming process depending on the size and complexity of your supply chain, but there are a variety of supply chain planning tools available to help.

Once the concept of resiliency is incorporated into the key enterprise planning functions (i.e., demand and replenishment planning, transportation management, production planning, etc.), the organization will find itself in a much better position to anticipate, absorb and overcome supply disruptions.

So don't let your organization become the next case study. Enterprises can no longer afford to keep their proverbial heads in the sand, depending solely on negotiated supply contract terms and blind optimism.

By investing the time and resources in a sound supply risk management program, you can do much to insulate your enterprise from supply shocks like the one experienced in the U.S. during the 2004-2005 flu season. Remember that a supply chain is only as strong as its weakest link; or in this case, its least resilient supplier.

Christopher Pickett is principal consultant with Adjoined Consulting (www.adjoined.com), a Kanbay Company.

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