The Hidden Perils of Supply Chain Innovation

Outsourcing, lean manufacturing and just-in-time inventory are proven cost cutters. But they can stretch global supply chains to a breaking point.

Further, relying on a single source for a critical part of a product can leave a company in a highly vulnerable position when the supply chain is interrupted. To be sure, risk diversification via multi-sourcing can help companies maintain a steady supply of critical parts. But risk diversification may not be achieved by simply lining up multiple suppliers. If the suppliers are all in the same region, a single catastrophic event can simultaneously degrade the capabilities of all the redundant suppliers.

In the assembly phase of supply-chain operations, the deliveries of subassemblies by dispersed assemblers must be highly balanced and coordinated to prevent the delay of the final assembly due to shortages of the subassemblies. While risk diversification is desirable at the component level, risk concentration (selecting suppliers located in the same geographical region, for instance) is preferable at the assembly stage.

Focused decision-making can help mitigate the risks of innovation. Supply-chain management decisions, for instance, have started overlapping with corporate financial strategy. CFOs are now working on ways to reduce cash-to-cash cycle times, achieving profitable growth, delivering predictable revenue and reducing the company’s risk profile.

Companies without centralized governance can hinder procurement, manufacturing and time-to-market processes in the supply chain, which can impact a company’s financial strategy. Supply chain risk management can be an essential part of that governance system, enabling finance chiefs to make sure that risks in the entire value chain are identified and mitigated so that financial goals can be met.

Supply chain risk assessment can be used to show the causes and consequences of a potential risk event by taking into account end-to-end cost, including inventory-carrying and capital costs. The chance to drive out inefficiencies and boost the bottom line make it worth the effort to undertake a supply chain risk assessment.

The beauty of the process is that it enables the company to pinpoint where and when the potential breakdowns can take place. Organizations then need to evaluate what are the risk triggers and where they could cause a negative outcome in the supply chain. That should be followed up with an action plan aimed at mitigating the severity of the disruption – or, conversely taking advantage of the disruption a competitor may suffer.

It is quite natural for companies to assume that supply chain disruptions only produce only downsides to their top and bottom lines – many companies with manufacturing operations in the path of the Japanese tsunami suffered tremendous disruption to normal operations. But there are some businesses that were able to cope with the resulting disruption better than their competition. GM is one example of an organization that clearly suffered a business disruption as a result of the tsunami, but in the aftermath was better positioned to resume production than its chief competitor, Toyota.

One way to set up an effective supply chain risk management operation within your company is by integrating the risk management, business continuity planning and crisis management function. This integrated approach provides a platform for the managers of those three functions to collaborate and consider a broader picture of issues that are obviously interlinked.

Using an enterprise risk management process (ERM) process across an integrated platform will promote a deeper understanding and assessment of critical threats and potential response to those threats from both a strategic and tactical perspective. Ideally, the data, qualitative information and recommendations developed via an integrated approach will be submitted to an internal senior executive or risk committee for execution. The key is to set up the structure and have the plan ready for execution well ahead of any risk event. During the planning phase, insights about competitors should also emerge. When the time comes to put plans into action, leadership can act as a single unit.

Outsourcing, lean manufacturing and just-in-time inventory can bring significant savings to an organization if their risks are properly managed. By implementing a holistic, enterprise-wide supply chain risk management program, companies also can uphold their commitment to provide a strong corporate governance process on behalf of the shareholders, which ultimately boosts their shareholder value. Organizations that do not are in a real sense working without a safety net and, in today’s high-risk climate, that is not a smart decision.

John Bugalla is a principal with ermINSIGHTS and Kristina Narvaez is president and CEO of ERM Strategies LLC.

5 thoughts on “The Hidden Perils of Supply Chain Innovation

  1. The next level for Supply Chain Innovation is supply chain finance (SCF). Risk is higher in the other three areas as discussed and SCF not all for companies or all sectors either.

  2. Interesting thoughts on supply chain management, I work for McGladrey and there’s a very informative whitepaper on our website that readers of this article will be interested in @ “Count, manage and move: Warehouse inventory control strategies”

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