Recent uncertainty in the global economy is not only having a negative impact on international economies, but an equally deleterious effect on global supply chains. As with the international economies they serve, global supply chains are interwoven and inextricably linked to one another. For instance, if one link is severed in the supply chain it can cause a ripple effect which could collapse the entire chain. I’ll look at some of the concerns for potential supply chain collapse, and some strategies to limit your exposure to such a risk.
Supply Chain Management Challenges
The good news: Supply chain management professionals have been able to implement important technology and strategic business initiatives (such as ERP systems) and value-added strategic business initiatives like outsourcing, just-in-time inventory, and lean manufacturing programs to reduce costs and minimize supply and service interruptions.
The bad news: These initiatives have unwittingly pushed supply chains to their breaking points. A disruption in any key area (as indicated below) could leave an organization unable to manufacture goods, and unable to ship product to customers—and will ultimately result in lost market share.
Potential Causes of Supply Chain Collapse
If you deprive a person of oxygen, he or she will turn blue, collapse, and eventually die. If you deprive global economies of credit financing a similar process occurs. The recent economic outlook published by the International Monetary Fund on November 6 stated that
…world output is projected to expand by 2.2 percent in 2009, down by some ¾ percentage point of GDP relative to the projections in the October WEO. In advanced economies, output is forecast to contract on a full-year basis in 2009, the first such fall in the postwar period. In emerging economies, growth is projected to slow appreciably but still reach 5 percent in 2009.
What this means for global supply chains is that certain key industries that rely heavily on consumer spending will likely be affected.
Let’s take the North American auto industry as an example. In September 2008 in the US, 159,000 jobs were lost—the most in one month since 2003. Auto sales fell to a 16-year-low as would-be buyers were unable to obtain credit financing. In other indicators, a survey of purchasing managers sponsored by the US-based Institute for Supply Management suggested that the manufacturing sector overall is weak. Among the report highlights:
To illustrate the global vulnerability of the global supply chain, the World Economic Forum (an international think tank not particularly well known as a source for SCM information) in its 2008 global risk document cited supply chain vulnerability as one of the key global risks in 2008.
Additional Factors that Can Lead to Supply Chain Collapse
During this economic downtown there inevitably going to be casualties, whereby companies will determine they cannot weather the storm and have to go out of business. If one of the key vendors in your supply chain goes out of business, what impact will this have on your organization? With a global economy, many suppliers are located offshore, and managing a disruption in supply will become more difficult to manage.
Although many of these situations are unforeseen, you have to consider risk elements when you try to assess vulnerabilities within your supply chain. It could be in the form of an attack by a terrorist organization to a major seaport, which could cause a major disruption to shipments of key raw materials or finished products.
For an organization connected to a global supply chain, sometimes issues arise whereby a licensed subcontractor to the manufacturing organization engages in unlawful business practices (such as child labor, or poor labor and environmental practices). These elements can have a negative impact on your brand. Alternatively, outsourced suppliers may consider substitution of lower-cost and unapproved raw material substances without advising anyone. One example of this was when lead paint was found on children’s toys destined for North American consumers and when melamine was found in both pet food and in toothpaste.
As many key commodities are sourced on a global basis, it’s not improbable that a key component in a process may be manufactured in a global region which is struck by a natural disaster like a hurricane or earthquake. This can have a destabilizing impact on a manufacturer’s ability to procure vital raw materials and meet customer orders. There have been notable cases where an unforeseen incident has caused an organization considerable harm. One well documented case occurred in 2001, when a fire occurred (the result of a lightning strike) at a semiconductor plant where Swedish cell phone manufacturer Ericcson was single-sourcing a supply of semiconductors. This fire caused Ericsson to lose significant market share to their key competitor (more details here).
Preventing Supply Chain Collapse
Proactive organizations have increasingly taken steps to minimize their exposure to risk, in much the same way manufacturing organizations have instituted quality control programs such as six sigma.
This has seen the development of risk management teams being set up in companies to review current practices and identify areas of potential exposure to risk, including their supply chain. The development of the practice first was introduced in a book written by Professor Yossi Sheffi (Director of the MIT Center for Transportation and Logistics) and titled The Resilient Enterprise: Overcoming Vulnerability for Competitive Advantage (see executive overview).
Among the key recommendations made by Professor Sheffi is to build redundancy and flexibility into your supply chain in order to minimize disruption:
Redundancy is the first line of defense to minimize supply chain disruption. This means adhering to safety stocks of finished goods to minimize the impact of demand variability, managing available capacity within the manufacturing location, and managing a wide variety of multiple vendors in your purchasing database.
Flexibility provides many options when faced with supply chain disruptions, including the ability to standardize operations in any location where a manufacturing organization is sourcing the same parts from the same vendor or multiple vendors. Having a similar set of machinery and training personnel will ensure that if there is a disruption, manufacturing operations elsewhere can partially fill the void until the effects of the disruption are known and managed.
Process Flow for Developing an In-house SCM Risk Assessment Program
The diagram below illustrates the steps that an organization could follow to implement their in-house SCM risk management program.
A Final Thought
My research into this topic made me think SCM risk management was similar to an insurance program to protect against unseen forces. I hope you’ll never be in the position of having to put these steps into practise. In this part of the early twenty first century it seems like the only certainty is uncertainty, however, and perhaps this is the most compelling reason to consider implementing these measures. Can you really afford not to?
I think I would also add transparency of data integration points to this list, as the middleware also is a contributing factor.
Kendall Gordan, SE
Thank you for your comments you have raised a good point what has been your experience in the integration points using various forms of the API middleware tools that vendor provides? Is it has streamlined and fluid as vendors would have you suggest.