In a world of increasingly complex supply chains, businesses are increasingly conscious of the need to ensure that they and their suppliers have made robust supply chain decisions. Being one of the most important factors affecting inventory management, it’s crucial that the supply chain runs smoothly. With that in mind, it's important to think carefully about the causes of supply chain failure. Here are five factors that may suggest a risk of supply chain failure.
A supply chain that involves a significant degree of offshoring is at a higher risk of failure than an entirely in-market supply chain. The reasons are many and varied. A firm's span of control often ends at the border – it’s not possible to micro-manage a supplier that is thousands of miles away. Language and cultural issues can also make it difficult to manage offshore suppliers.
Natural disasters, biosecurity events and disorder are often major factors affecting inventory management. Because supply chains regularly cross borders however, the potential for chaos is increased. If a brewery blends hops from multiple countries, it is exposed to climatic risks in each of those growing regions. If a manufacturer sources several vital parts from different countries, disruptive events in any of those countries could disrupt the supply chain and result in the factory line having to stop.
Inefficient Just in Time Inventory Management
Increasing numbers of manufacturers are turning to just in time or lean production methodologies. Just in time broadly involves a manufacturer ordering inventory as orders are received so as not to require a large volume of stock in inventory. This approach allows businesses to order only as much inventory as they require, so it is often the most efficient approach, particularly where a manufacturer has quite tight margins. Unfortunately, this approach can also result in the occasional supply chain failure as lean supply chains are less resilient to interruptions. This is particular the case if multiple businesses are practising just in time, as there can be very little flexibility if delays hold one supplier up. For this reason, businesses who adopt a just in time approach need to regularly audit their supply chain to spot potential factors affecting inventory management.
Many manufacturers are facing increasingly steep cost pressures. Businesses further up in the supply chain come under pressure to keep costs to consumers low, and this pressure filters down the supply chain. The end result is that to get business, suppliers need to do more with less. This pressure often leads to major supply chain breakdowns on a regular basis and if this occurs, businesses often adjust their expectations. On the other hand, suppliers sometimes absorb cost pressures and make do. Although this may seem like a boon for the purchasing business, the reality is that this level of financial pressure makes the supply chain highly vulnerable. Supply chains in this situation can abruptly fail, leaving manufacturers without vital stock that they require.
The Shallow Supply Chain
Less commonly, some businesses depend on just one or a handful of suppliers. This approach can also increase risk, particularly if those suppliers are unreliable. If your business deals with a few key suppliers, think closely about the risk to your business if those suppliers were suddenly unable to meet their supply commitments. Of course, some businesses are not in a position have a backup supplier (particularly if their current supplier is highly specialised). In that case, businesses should work closely with their suppliers to identify and iron out factors affecting inventory management and the supply chain.