By Bill McBeath

Advances in leaner and faster supply chains have, in many cases, come at the price of increased brittleness. It is time to make supply chains more resilient, and deal with risk more intelligently, to maintain the gains from lean strategies, and take performance to the next level.

We're Getting Faster, Leaner, and More Spread Out

The past two decades have witnessed dramatic improvements to supply chain performance through lean manufacturing, JIT inventory, ever-increasing velocity, extreme outsourcing, and related transformations. In the 10 years from 1992 to 2002, the ratio of inventories to shipments in the U.S. fell from 1.65 to 1.35 (See Figure 1). These are enormous numbers in the context of our multi-trillion dollar economy.

Figure 1

At the same time, the complexity and length of supply chains have increased, due to ever-greater out-sourcing and globalization. This is evidenced in the upward trend in the average length of haul for freight across almost all modes, over the past 40 years (Figure 2).

figure 2
Average Length of Haul for Domestic Freight

Supply Chain Brittleness and the High Cost of Glitches

There's no turning back to the old ways of doing things. These faster, leaner, more virtual chains have resulted in increases to productivity, as well as improved service levels. However, these improvements can sometimes come at a cost—increased brittleness of supply chains. Reducing inventory and building everything just-in-time, without taking steps to improve flexibility and resilience, means that disruptions in the supply chain can quickly become expensive disasters.

As design and manufacturing are outsourced, it makes companies more vulnerable. If your contract manufacturer's line goes down, it is your line going down! If your key supplier’s design doesn't work, it is your design that's now broken. In the move to extreme outsourcing, we've already seen many stumbles. "Throw it over the wall" approaches present new challenges to cope with.

The globalization of logistics adds yet more risk. Setting aside things like political upheaval or terrorism, just the everyday complexity of multi-mode, international logistics increases the chances of something going wrong at border crossings and hand-offs, and makes tracking all the more critical and challenging.

Firms are also doing more postponement, often involving in-channel assembly and sophisticated merge-in-transit operations. This requires coordinating goods in motion—multiple components that need to arrive together in precise time windows to be combined into the final product. If something goes wrong with even one delivery, then the whole order is late.

The high cost of supply chain disruptions was starkly highlighted in a study by Kevin Hendricks and Vinod Singhal. They found that each significant supply chain disruption resulted in, on average, -40% loss in shareholder value. The impact on Operating Income and ROA was even more dramatic (see Figure 3).

It is well understood that expediting costs—increases in the cost of raw materials, as well as transportations costs—fines and penalties, as well as lost business—result from poor coordination in the chain.

Of course, there is the upside opportunities that can also be overlooked. A great product takes off, your competitors are witnesses and move to counter your offerings, often approaching the same suppliers, creating scarcity of supply.

Somehow you need to create a smarter strategy to deal with the upside and the downside of the supply chains.

figure 3
Average Changes to Profit and Returns Associated With
Supply-Chain Disruptions

Given these trends and the high consequences of glitches, the basis of competitiveness is shifting. It has become imperative to build more resilient supply chains; chains that are not just lean and fast, but that can also respond to disruptions, upsides and hard-to-predict events. There are an almost infinite variety of disruptions that can afflict a supply chain. Here are a few examples:

• Supplier failures (financial, production, design, etc.)
• Natural Disasters
• Work stoppages—Labor disputes
• Infrastructure outages (fire in plant, power grid down, etc.)
• Unanticipated demand surge or drop-off
• Unanticipated supply constraints, allocation, price increases
• Political upheaval
• Price, Currency, and Interest rate fluctuations

Taken one at a time, disruptions appear to be rare, unpredictable and often one-time events. However, in aggregate, disruptions are not rare. They happen almost continuously in any major supply chain. While they may not be predictable individually, it is possible to build resilient supply chains designed to mitigate and proactively deal with many of these risks.

It's time to change the way we think about risk management. The traditional view looks at risk management investments as insurance policies—necessary cost burdens that don't contribute to corporate performance. With a broader view, we see that disruptions, in particular mismatches in supply and demand, and logistical problems, happen every single day and seriously affect a company's performance. Effectively implementing risk management techniques dramatically improves a company's performance (lower total cost and higher service levels) compared with the traditional approaches that don't adjust well to unpredicted events.

Elements of Resilient Chains

So how can we build resilient chains? It is important to strengthen and build flexibility into the links in the supply chain. This means crafting formal and informal agreements between trading partners that can evolve over time and adapt to unforeseen changes. It requires a broad based approach to managing risk, as illustrated in Table 1.

table 1- Elements of Resilient Chains

The Next Frontier

Supply chains have evolved and continually improved over time. These improvements have tended to come in waves that build on previous advances. It takes a blend of strategies from relationship management, technology, smarter manufacturing and logistics strategies. As you think about building a resilient approach, ultimately it will allow you to succeed at lean yet responsive approaches to the market place. Building resilient chains is the next frontier.

figure 4 -
Evolving to Resilient Supply Chains

The world is a chaotic, ever-changing place, with an ever-accelerating pace. Product lifecycles continue to shrink. Disruptions are the norm, with fewer buffers—in time, capacity or inventory. So, while building resiliency in the supply chains processes, they will thrive and out-perform their competitors. Understanding the risks and managing to avert them can prevent unplanned cost and improves total performance. As the inventible disruptions occur every day in supply chains (as in life), those that are the most resilient will win by a long shot.

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©2004 ChainLink Research, Inc.