Prof. Elena Revilla, IE Business School
Supply chain management is still far from reaching the benefits promised by the achievement of a seamless, end-to-end pipeline. One of the main reasons for this failure is that companies are subjected to unprecedented levels of supply chain disruptions. The increased risk of disruption comes from a number of sources such as the growth in outsourcing, globalization, reduction of the supplier base, reduced buffers, increased demand for on-time deliveries, and shorter product life cycles.
The tsunami catastrophe that struck Japan in March 2011 demonstrated the disturbing consequences of supply chain disruptions. The ripple effect of the stoppages to supply and production in Japan was felt in many areas of the world, because numerous key parts are exported to global operation from this region.
Take, for example, the impact on consumer electronics company Apple, which relies on suppliers in Japan for 25% of the components used in its new iPad 2 product. Moreover, many of these contractors are sole-source suppliers. The iPad 2 went on sale just hours after the tsunami hit, and the subsequent shutdowns caused stock shortages and long delays to deliveries. The fallout not only frustrated Apple’s customers, but also its shareholders since the company’s share price declined by 8% due to the disruptions that followed the disaster.
Many lessons can be drawn from these terrible events, but one of the most worrisome is that firms either ignore or fail to recognize high-impact risks – and even among those that do acknowledge such risk, too many neglect to assess the potential impact in sufficient detail and hence cannot respond accordingly. It seems that managers are unable to create contingency rules and procedures for complex, high-risk business situations. Strategically focused business continuity plans are often not complemented by implementation plans at the operational or tactical levels that enable organizations to respond quickly and efficiently to crisis situations.
These shortcomings can be seen in the results of a recent research study carried out by the MIT SCALE network. The Global SC Risks study collected responses from 1403 firms representing 69 countries across the world. Based on an analysis of these responses, we have concluded that although companies face a wide range of threats, the implementation of disruption management practices does not appear to correlate with the nature of the sources of risk. A consequence of this misalignment is that the level of effectiveness of supply chain disruption management is rather poor, and as a result, the level of disruption becomes higher, undermining SC performance.
The question is clear. Why don’t companies learn from past disasters? Why don’t companies build on their experience running supply chains in global markets in order to mitigate the effects of disruptions? One reason is the relative novelty of the SC disruption management field, and its lack of organization. According to our study, around 60% of the surveyed managers don’t work actively on supply chain risk management or don’t consider it effective. Managers lack a framework for guiding them on how to deploy these practices, and for determining which ones are best for their particular supply chain situation.
We have identified successful cases of SC disruption management from the analysis. These cases, combined with the extensive knowledge of risk management available in the MIT SCALE network, have enabled us to devise such a framework. The framework helps supply chain managers and executives to understand the nature of the risk sources for their supply chain structure. It also identifies the design and implementation tools for managing disruptions that best match supply chain design.
The first step in constructing the framework is to understand how your supply chain structure determines the impact of the different sources of risk. For example, globalization and cost-cutting methods such as lean manufacturing can raise the organization’s risk profile. Companies should appreciate the risks involved when they subject their supply chains to more stress by focusing too much on efficiency and globalization at the expense of resilience.
Our Global SC Risks study envisions a classification of the sources of risk into two primary categories: internal and external. The first one, internal risk sources, is related to operational contingencies inside the supply chain. It relates mainly to how cost-reduction oriented versus responsive is the supply chain. External sources of risk arise from the organization’s exposure to the external environment, and is influenced by globalization (local versus global). In conjunction, our study differentiates three types of external risk sources: natural hazards (hurricanes, tornados, earthquakes, or tsunamis), market sources (price collapse, competition), and economic and social sources (recession, labor instability, political events, currency devaluation, among others).
The next step is to answer the question: How can supply chain disruption management diminish the effects of disruptions coming from internal and external risk sources? In order to do this, managers must understand that disruption management tools which diminish the internal risks are different from those that help companies to face external risks. This is because the nature of the external events does not come directly from the supply chain operations, and the company has imperfect and incomplete control over the environment. Accordingly, management tools dealing with the internal risk require attributes like control, process orientation, prevention, monitoring key nodes, visibility, and cause oriented. The deployment of disruption management tools for diminishing the effects of external risks requires the involvement of C-level executives. The required attributes here include relational management, reactive orientation, and external awareness that let monitoring market, political, weather, economy, and extraordinary events.
With this in mind, we propose that disruption management tools fit along a continuum with respect to their relative capacity for mitigating internal or external risks. Additionally, some tools can address both risks simultaneously. For example, the business continuity plan identifies the organization’s exposure to internal and external threats, and synthesizes hard and soft assets to provide effective prevention and recovery for the organization. Finally, our framework requires realigning the risk sources with the disruption management approaches.
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[This research paper has been reproduced with permission of the authors, professors of IE Business School, Spain http://www.ie.edu/]