By: Kiera Outlaw, ProcurementIQ Staff Writer
In the 21st century, the procurement world is learning a hard lesson: supply chain disruption is an inevitable reality. Chief among them – the 2011 and 2016 earthquakes (and tsunamis) in Japan; the 2014 Bardarbunga volcano eruption (which caused billions in lost revenue for the aviation industry in Europe); and the 2015 Hanjin bankruptcy. Supply chain disruption can be catastrophic to an organization’s operations and profitability. Which begs the question: how can a supply chain be fortified to combat the next big disruptor?
Before we jump into that, let’s look at Toyota. After the 2011 tsunami in Japan the company reported profit loss of more than 75% for its 4th quarter that year. To put this in perspective, Japan accounted for about 40% of Toyota’s production in 2011. The company vowed to strengthen its supply chain against the next catastrophic event. Five years later, two major earthquakes rattled the island of Kyushu back-to-back and put Toyota’s restructured supply chain to the test. While the company was able to weather the 2016 catastrophe better than the one in 2011, its lean supply chain vulnerabilities still led to production shutdowns.
Toyota’s predicament goes to show that companies worldwide must focus on creating a resilient supply chain that can effectively weather the storm of major disruptive incidents. But, how does one go about preparing for supply chain disruption?
Resilient supply chains exhibit most of the traits listed below. Implementing these traits into your supply will give your organization the best chance of bouncing back efficiently once a major disruption occurs.
Risk management plan. The most effective way to create a resilient supply chain is to develop a sound risk management plan. The basics of a risk assessment plan include identifying, analyzing and evaluating all potential internal and external risks to the supply chain (and overall organization). Additionally, the risk assessment plan should also include mitigation plans to help lessen the organization’s exposure to risk and reduce the overall severity of a crisis. For more, read Managing Supply Chain Risk in a Globalized Economy.
Business continuity plan. Developing a business continuity plan will allow for a set of processes and a chain-of-command to activate and address major issues once a disruption occurs. This is a crucial component to developing a prepared supply chain as it helps reduce confusion and allows for quicker response time.
Diversify. Diversifying your supply chain is imperative. The goal here is to assess any potential bottlenecks and minimizing those risks across several different suppliers. The last thing an organization needs is to rely on one supplier for a significant input. Should a disruption occur that causes that supplier to shut down production, then your organization is also at risk of production issues.
Transparency. This is another key component of supply chain resiliency. According to Deloitte’s Global Chief Procurement Office Survey of 2018, an astounding 65% of procurement leaders indicated they had “limited or no visibility beyond their Tier 1 suppliers.” In a globalized world with global supply chains this is simply unacceptable. The implementation of the check points above will eventually help to create more transparency within your supply chain, especially regarding developing a risk management plan. This is because the risk management plan will force you to identify and prioritize risks, which requires looking further up the supply chain. Moreover, risk management is an ongoing process of repeatedly monitoring and managing the supply chain and its inherent risks, thus creating greater transparency. You should also consider building a culture of risk management across your supply chain, it’s a solution where everyone benefits.
Transparency also extends to the organization overall and hearkens back to the business continuity plan. Ensuring that the overall organization has a clear corporate structure and departments with distinct responsibilities also helps to reduce confusion and allows everyone to get to work immediately should a major disturbance occur.
There’s your start. The blueprint outlined above is a great start in preparing your supply chain for the next inevitable disruption. But, the single greatest factor in handling a disruption is acting fast. On the back of the newly announced tariffs on steel, aluminum and hundreds of billions of dollars’ worth of other products coming into the US… is your supply chain ready?