How Risky is your Supply Chain?

The last twelve months has seen supply chains under near constant threat – some real, some threatened, some imaginary. The banking crisis putting suppliers out of business, swine flu hitting work forces, heavy snow constraining traffic movement, ash clouds grounding aircrafts, oil leaks closing fisheries, floods in Pakistan and mud slides in China. You could be forgiven for thinking that Force Majeure was becoming a regular occurrence, rather than a once in a lifetime act from above.

In the ‘old days’, when goods went through several hands, each with a stock holding before they reached the consumer, the impact of such calamities could be absorbed, but with direct sourcing and minimised stock holding the effect is almost immediate.

Given how vulnerable supply chains are now, and the fact some companies never recover from a major supply chain failure, you would think that businesses would protect themselves. And yet few do. There are insurance policies you can take out to cover some eventualities, but they never cover the true cost of the disruption. Some argue that an advantage of modern supply chains is that although the impact of failure is felt quickly, recovery is equally quick. Research though, has shown that the effects of a supply chain failure can be felt up to two years after the failure has been rectified.

So how can companies manage supply chain risk in a global economy? As with all management tasks, the first step is to understand and quantify the risks. Of course the simplest and often most cost effective way of managing supply chain risks is to prevent them from happening, or at the very least minimise the chance. Those risks that cannot be eliminated at source need to be analysed to see what opportunities there are to mitigate their impact. Again, as with many other aspects of management, you start with those risks that are either most likely to occur or, if they occur, will have the biggest impact.  Techniques for measuring health and safety risks can be helpful, i.e. high likelihood of occurring, and high impact when it occurs, are put to the top of the list.

There are numerous and varied supply chain risks, and numerous and varied strategies to mitigate them. They can range from a fire in your warehouse to the failure of a Far East supplier, through to a more recent risk identified by the International Maritime Bureau (lMB), warning the shipping industry of an increasing threat to their supply chain through cyber attacks. Hackers are now able to break into ever more sophisticated IT systems to identify release codes or passwords. Therefore managing systems for the movement of goods should be shored up and strengthened.

Mitigation strategies for all supply chain threats might range from continual system strengthening,  installing a sprinkler system to seeking alternative sources of supply that could be activated at short notice. You might consider having duplicate tooling available if that is relevant, and you might even set up sharing agreements with partner companies, whereby you can help each other out in times of need.  If the disaster would result in having to set up a new operation in a new site, think about how you would do it and who would do it. Do you have someone appointed to lead the disaster recovery team? Do you know who you would turn to find new premises? Can your IT supplier provide you with, and configure, a new system at short notice? If product comes to you by sea, you might want processes in place to fly in replacement stock. Just after a disaster has occurred is not the best time to be negotiating good deals.

These are all things that you need to plan out in advance so that should the disaster occur, your organisation is ready to respond straight away. Again, research shows that your customers will stay with you and live with the inconvenience for a short period, but will soon desert you if the problem goes on too long. If you don’t have a comprehensive supply chain disaster recovery plan then act now before it’s too late. The cost of some of these mitigating actions may seem high, but they are nothing compared to the cost of a supply chain failure, or ultimately of losing your business.