By Bill McBeath
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.
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).
Today the material is acquired, and integral processes are
performed, by a network of many dozens of "virtually integrated" firms,
each master of their own specialty. We are getting more spread
out, not just geographically, but also organizationally.
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
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.
The Resilient Supply Chain
to Profit and Returns Associated With
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,
- 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,
- Political upheaval
- Price, Currency, and Interest rate
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.
Risk Management Elements
Managing the Links
Relationships that adapt to market changes
and evolving needs
vetting, proactive supplier performance monitoring
Avoidance of supplier problems, early
awareness of supplier problems and rapid corrective
Visibility, exception alerting (supply delivery,
contract mfg, logistics, etc.)
Early awareness and rapid correction of issues at
all stages of the chain
No single point of failure
Proactive Risk Management
and Predictive Business Intelligence
Risk identification, assessment, prioritization,
Wiser use of limited risk management resources.
Rapid response when things go wrong.
Developing and monitoring early warning
indicators and systems for disruptions of all sorts.
Rapid response. Crisis avoidance or reduction.
Market intelligence, forward-looking, predictive
Flexible, pre-emptive strategies. Proactive execution.
and Design Practices
Range forecasts, consensus planning
Better preparedness for upside and downside demand
Design using common parts, SKU de-proliferation
Flexibility to meet variety of demand scenarios
with given amount of inventory
Lead time reduction, postponed differentiation
Reduced inventory exposure
Flexible plants that can build a variety of mix
and volume. Plants that can evolve. Common design
Mitigate demand-supply matching risk. Flexibility
to quickly adapt to immediate demand changes and longer-term
product changes in markets
Multiple upstream sources
Ability to ramp volumes. No single point of failure
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.
ChainLink Research, Inc.