In theory, intricate supply chains can provide a great deal of comfort. Every detail is mapped out in meticulous detail – not just where inventory is coming from and going to, but how it will get there and within what timeframe. In reality, not even the best logistics experts can predict the future so as a result, supply arrangements will always involve a degree of risk. Even the biggest enterprises can get it wrong. In 2000, a fire at an Albuquerque factory disrupted the supply of radio frequency chips to Nokia and Ericsson, two of Europe’s largest mobile phone manufacturers. Ericsson was poorly prepared and ultimately delayed in releasing a major new product. By contrast, Nokia’s supply chain gurus noticed there was something amiss before the supplier notified them. Nokia was better prepared, and was able to lean on other suppliers to get them over the line.
Of course, the magnitude of impact of supply chain failures are often minor and can be easily mitigated after the fact. But, as the Ericsson and Nokia example shows, sometimes a disruption is critical – with the potential to stop work at a factory or failure to meet a major client commitment. Because the impact of supply chain failure can be so damaging, businesses need to understand and manage supply chain risk. But for small-to-medium enterprises without dedicated logistics experts, getting to grips with risk can be baffling. Here are some strategies for getting on top of the basics.
‘Audit’ your Supply Chain
Generally, supply chain risk management rests on knowing the likelihood and the potential impact of failure right down the supply chain. While it may not be economic to engage logistics experts to work through the supply chain, there’s no reason why smaller businesses cannot thoroughly examine each and every point of their supply chains to identify potential points of failure. This exercise should involve asking the following three questions:
- Where are the points of failure?
- For each point of failure, how likely is it that a significant disruption will occur?
- For each point of failure, what are the consequences of a significant disruption?
At this stage, it would also be prudent to audit your forecasting. Forecasting errors can be just as disruptive as supplier or transportation failure, so consider your planning methodology and test the assumptions your forecasts rely on.
If you can draw your supply chain on a straight line, there will inevitably be bottlenecks when something goes wrong. Relying on a single supplier at any stage of the supply chain exposes your business to significant risk. Once you have identified the points of failure in the supply chain, start to think about how you might work with more than one supplier to mitigate the risk of poor supplier performance.
Respond to new developments
Despite your best efforts to mitigate risk, disruptions can still occur from time to time. If and when this happens, consider the likelihood and impact of ongoing or repeated failure. This could involve discussing risk factors with the supplier to strengthen their reliability, but could just as easily involve exploring alternative supply options.
Business continuity: consider the worst-case scenario
Auditing the supply chain involves a forward-looking assessment of risk and consequences based on your understanding of your business’ supply chain. This understanding will be, either explicitly or intuitively, based on historical supply chain performance.
In assessing future risk based on historical performance, it can be easy to forget about infrequent, but potentially devastating events such as natural disasters. A comprehensive supply chain risk management strategy should consider these risks as well.