The House of Cards - Lessons learned from the banking crisis

In the years to come much will have been written about what caused the 2008 banking crisis and no doubt plenty of wisdom of the after event variety will be put forth.

In the meantime are there already lessons that supply chain professionals can learn from this debacle?  I believe there is, and the main one is the degree of interconnectedness that as an extremely efficient and tightly integrated money supply chain but one that has proved extremely vulnerable to one of the links breaking.

In the supply chain world many companies have built very lean supply chains often starting in the Far East and with minimal stock between each link.  Stock acts as a buffer between links in the supply chain potentially enabling reconnection’s to be made if one links break.  The logic however has been that stock equals cost due to the working capital it ties up and that to be competitive, stock has to be driven out of the supply chain.  Another strategic objective that many companies have followed has been to minimise the number of supply chain relationships.  Opting for single sources of supply enables closer relationships to be formed, better customer focus and service to be obtained and economies of scale to be achieved.  In recent years cooperative supply chains have emerged where otherwise competing businesses pool their resources to provide further cost efficiency.

The down side is that if one of the links in the chain breaks then the whole chain fails.  Can this really happen?  Well it already is.  As the recession deepens companies are going out of business causing serious problems for the customers they supply.  The automotive industry is particularly worried about this and it is possible that by the time this article is published a major manufacturer may have gone taking a number of its suppliers with it.  That is bad enough but there is a knock on problem for the other manufacturers they supply that could in turn take out other manufacturers who are otherwise in reasonably good shape.

So what are the lessons learned :-

1. The last few years of relative stability have allowed complacency to creep in and companies should re-assess their supply chain’s resilience.  A well maintained supply chain risk assessment should now be an essential business requirement.
2. Strategic stock is an important means of supply chain protection.  Critical items should be held in sufficient quantities to allow time for alternative supply sources to be opened up.
3. In some cases that strategic stock may not be finished product.  It might be raw materials or part finished product.
4. Multiple sources of supply can also provide protection.  Buyers should ensure that supply can be re-routed around breaks in the chain.
5. For a number of years there has been a debate about the relative merits of lean vs agile supply chains.  This latest crisis should swing the argument more towards agility being the more critical requirement.

Clearly each organisation will have to produce its own supply chain risk assessment and make its own judgement about how best to protect its sources of supply and demand.  The key point is to learn the lessons from others rather than wait to learn from our own situation.