Ten Thousand Miles of Risk Exposure

April 8, 2011
Natural disasters, political unrest and other events are leading many businesses to re-examine the risks and rewards of operating a global supply chain.

The recent disasters in Japan have captured global attention. Who could have imagined that any country could be so impacted in a single day? Of course, because Japan represents a global center of commerce and trade, questions quickly followed about the economic impact that every company who sources products or components from Japan will inevitably face.

While the tragedy in Japan has focused attention on the inherent risks of managing a global business, it is only the most recent, and perhaps the most sweeping, example of supply chain disruption. The economic downturn of 2008-2009, continuing unrest in the Middle East, hurricanes, and even pandemics of SARS and H1N1 — all have demonstrated the enormous and unforeseeable dangers of managing a supply chain that spans thousands of miles and multiple continents.

When considering the inherent risks of managing any 10,000-mile endeavor, some natural questions arise. Do these risks outweigh the sometimes substantial benefits of operating internationally? In the year 2011, is it profitable to operate a “local” supply chain? And how should you make decisions about the geographic footprint of your business network?

Considering Risk in the Top-Level Strategy
While it is impossible to foresee every natural disaster or other supply chain contingency, a consideration of such disruptions must be part of the foundational strategic planning process.

While many North American companies source products or components in Asia because of a perceived lower cost, they also need to consider the invisible cost of risk exposure. After all, it only makes sense that a 10,000-mile supply chain carries significantly greater risk than a 200-mile supply chain.

In order to make intelligent sourcing decisions that balance risks with financial rewards, more businesses are using advanced tools and processes to examine not only isolated charges such as piece-part prices and labor rates, but the total landed cost associated with various procurement strategies. This cost reflects the real financial value delivered by various sourcing strategies. It includes a consideration of not only labor and part costs, but also transportation, handling, duties and taxes, damage costs and so forth.

By analyzing the total landed costs of a variety of procurement strategies, executives can realistically assess the potential value delivered by a global supply network and make informed decisions about the balance of risk to reward. Many companies are finding it is actually less expensive to source products or components closer to home because risks, lead times and transportation costs are dramatically lower. It is important to make this assessment an ongoing process, in which frequent updates are made as risk factors change.

Once a top-level supply chain strategy is in place, leading companies also use advanced tools and processes to create contingency plans, through business simulations and what-if scenario analysis. These businesses are minimizing their risk exposure by creating back-up production and distribution plans that include second- and third-tier materials sources, component vendors, substitute parts and transportation carriers. They are also developing prioritized allocation plans, so that scarce inventory will be allocated in the manner that makes the best strategic sense.

Due in part to lean manufacturing strategies, many supply chains include a single vendor that makes a component that is critical to the overall business mission, because it is shared across many products. What-if analysis can prove especially important in developing work-around scenarios if that vital supplier experiences a major disruption. The recent Toyota recalls, which involved over 8 million vehicles worldwide and caused incalculable harm to the brand, was caused by a single flawed component, made by one supplier, that was shared across many vehicle models.2 Obviously, if any supply chain places this much emphasis on one vendor or a single component, creating a focused contingency plan must be a strategic priority.

By pre-defining the right set of response levers that will be activated in the event of a supply chain disruption, leading businesses are preparing themselves to manage supply chain contingencies based on long-term strategic priorities — instead of scrambling to make hasty, ill-informed decisions when the unthinkable occurs.

Managing Risk on a Day-to-Day Basis
End-to-end risk exposure must also be considered, and managed, at the tactical and operational levels. Running what-if scenarios in advance, at the tactical level, can help companies operate through these short-term supply contingencies, without significant interruption or a long-term business impact. There should be contingency rules and policies in place at the operations level, just as these exist at a strategic level.

It is also essential to monitor daily operating conditions on an ongoing basis so that short-term performance threats can be anticipated and managed as effectively as possible. Since variability is a given at the operational level, it is crucial to maintain a robust, ongoing Plan-Do-Check-Act (PDCA) cycle that continuously monitors, and corrects, any mismatch between supply and demand.

By identifying variations in the day-to-day plan, and quickly executing decisions, companies can create an ongoing learning capability that improves their ability to correct their course. A continuous PDCA process at the operational level can address minor issues before they become major supply chain disruptions, by keeping planned and actual results as close as possible.

Turning Business Adversity Into Advantage
Even the best companies cannot foresee every emergency; however, it is critical to remember that, whether performance is disrupted by a major or minor event, long-term success lies in being prepared for any deviation — and acting both quickly and decisively in response.

The downside to any supply chain disruption can be lost revenue, lower profits and decreased market share. But, for those businesses that have already put in place top-level strategies that mitigate their risk exposure — as well as a robust PDCA process that corrects the day-to-day course at the operations level — a broad disruption in the industry can actually be turned into a growth opportunity.

Whether a supply chain spans 200 or 10,000 miles, by identifying and managing risk, companies can position themselves to manage through the chaos to protect revenue, profit and market share.

1 “Japan Faces Big Chore of Cleaning Up,” msnbc.com, March 24, 2011, http://www.msnbc.msn.com/id/42256766/ns/world_news-asia-pacific/

2 “Apologetic Toyota Looking to Outside Quality Input,” Reuters, February 5, 2010, http://www.reuters.com/article/2010/02/05/us-toyota-idUSTRE6133U820100205?pageNumber=1

Kelly Thomas is senior vice president of JDA Software,www.jda.com.

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