Supply chains are becoming more complex while at the same time disruptions to this distribution process are increasing in frequency and severity. A recent report by the World Economic Forum indicates that significant disruptions can reduce price shares of affected companies by an average seven percent. While this might seem like a small portion of price shares, the overall impact can have lasting repercussions for companies that want to expand.
What exacerbates these effects is that natural disasters and extreme weather conditions are largely unpredictable. However, other disruptions pose threats to supply chains. These include systemic vulnerabilities caused by oil dependency, political unrest (which impacts oil dependence), cyber crime, information fragmentation and the rising costs for trade financing and insurance. It is not surprising that more than half of companies worldwide deem supply chain protection a top priority.
Overcoming disruptions involves steps that industry groups and governments across the globe must take to have a more resilient supply chain. Doing things such as expanding the usage of data-sharing platforms for identifying risks, effective response mechanisms and institutionalizing a risk assessment process can help to improve responses. A uniform system may help with building cooperation among all affected parties. Industry groups, governments and consumers engaged in response strategies through common risk vocabulary and data sharing are willing to join forces.
For the private sector, companies can be supportive of broad measures taken by these groups. However, they can do even more by making sure their supply chains benefit from resilience and risk-resistant strategies. Stress tests are beneficial for determining if assumptions and contingency plans cover possible scenarios after a disaster interrupts the supply chain.
Another helpful practice is to develop business continuity plans and protocols that address major concerns. Inevitably, disruptions will occur during the normal course of business. Those that survive will have lines of authority and plans in place to prevent a major market share loss to competitors that are better prepared.
Some may question whether planning for disasters will help prevent disruptions to supply chains. For example, carrying lean inventory supplies could backfire if operations are halted because supplies are on backorder waiting to be restocked. While this is a valid business concern, all companies should develop contingency plans that will go a long way towards mitigating issues caused by unpredictable times.
The awkwardness of being unprepared could have long-term consequences that extend beyond the waiting period of restocking inventory. At the very least, a clear contingency plan sends a message to customers that services within the company’s controls will not be compromised by a natural disaster.
Not only are contingency plans essential for overcoming supply chain disruptions, but these plans must be adaptable based on current scenarios. Supply chains are easily established during stable times, but will need to be reshaped when a company faces volatile circumstances. Through elements of dynamic operations, companies can accomplish this by structuring plans around:
Another crucial consideration for overcoming supply chain disruptions is the continuity of information technology. For many companies, this represents their connection to the outside world. That outside world is a direct link to suppliers, customers, employees and all parties affected by the interruption of the supply chain.
When IT is configured correctly, resilience within the supply chain increases. Data and information sharing, preprogrammed responses, analytics and scenario modeling are all necessary components. Because business continuity is maintained through the accessibility of real-time data, the structure for data and information sharing is extremely important this is the cornerstone of resilience from IT, which depend on rapid dissemination of supply chain fixes that are data-driven. Furthermore, companies should have secure, scalable and re-routable IT systems.
Just as the extent of some natural disasters are unpredictable, so is the insurance of maintaining a high level of performance. In essence, contingency planning for supply chain disruptions is a financial exercise to balance service with cost. Fully developed contingency plans may require maintaining large inventory levels for some companies. The balance between safety stock, transportation costs, lead times and inventory holds becomes tricky.
It is worth noting that as more manufacturers adopt just-in-time inventory strategies, a disruption in the supply chain can have a domino effect. However, there are ways that risks to the entire operation can be minimized. Most manufacturers report having positive outcomes from just-in-time inventory strategies most of the time.
Risks become problematic when large disruptions occur within the supply chain. Plans that include a lean inventory count will not work well when an adverse change in the market occurs. The lack of inventory will have a negative effect on the company.
This is largely avoidable, however, when manufacturers balance safety stock and inventory carrying costs instead of transportation mode expenses. Additionally, the right balance between bulk lots and economy shipments with smaller lots and express shipments is equally important. There is a constant balance between delivery reliability, lead time and flexibility for the unknown.
Contingency plans for external threats to supply chain disruptions are sometimes easier than preparing for internal threats. Nevertheless, companies are wise to also include plans for disruptions such as stock outs, breakdowns or employee strikes. These are more controllable than external threats, but communicating and coordinating with key suppliers is still very important.
Supply chain disruptions will impact the customer, whether the threat is a natural disaster or an internal issue. For the most part, customers understand that when a natural disaster occurs it is beyond the company’s control. They still expect the company to have well thought out plans to remedy the situation so that their needs are met.
During an internal disruption, the company should have plans that deal with each type of disruption. An employee strike might require relationships with staffing agencies to keep operations running. Breakdowns in equipment can be remedied with rentals or available capital to purchase a replacement.
Typically, customers choose which supplier to use based on its ability to develop and implement contingency plans to overcome disruptions. Regardless of the situation, customers expect a high level of service and quality in performance.
There are many essential steps that companies must take to improve supply chain resilience before, during and after a disruption. Just to name a few, improving alert and warning systems, eliminating supply chain bottlenecks and sharing data among affected parties will go a long way. Companies can also benefit from having a culture of risk management with multiple suppliers to fill gaps left by a natural disaster or internal problem.
Effective business practices that include preparedness measures is crucial for any company that wants to remain strong after a disruption to its supply chain. Information sharing structures, IT systems, communication tools and a continuation of essential inventory will help to strengthen the supply chain. Those that adopt a comprehensive blue print that covers every contingency will be in a better position to recover from a disruption. It is also possible for the company to gain a competitive edge over other companies that were not prepared.