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Risk-Proofing the Supply Chain

By APICS CEO Abe Eshkenazi, CSCP, CPA, CAE | 0 | 0 | January 20, 2012

Last year, Far East manufacturing centers experienced two high-profile natural disasters that highlighted for manufacturers and supply chain and operations managers the pressing need for risk mitigation strategies. I'm referring, of course, to the March earthquake and tsunami in Japan and the autumn floods in Thailand. The events exposed serious vulnerabilities in many organizations' supply chains, from automakers to producers of hard drives. They also showed companies what happens when a supply chain isn't built to withstand a severe disruption to a key supplier.

The recent Wall Street Journal article "Reinforcing the Supply Chain" scrutinizes some of the supply chain activities of companies in the aftermath of Japan and Thailand. In Japan, representatives from an electronics manufacturer called Jabil "met with most of its major Japanese suppliers to encourage them to develop more than a single source for parts and raw materials ... [They] also urged them to stop clustering their factories around their headquarters."

Erich Koch, chief supply chain officer for Jabil, says that natural disasters make dual sourcing one of the company's highest priorities. But are such efforts justifiable to investors and stakeholders? According to the Journal, "Backstopping doesn't pay off unless there is a disaster." As for the return on investment, "If we're lucky, absolutely zero," says Sean Cumbie, global supply chain management vice president at German-based Qiagen NV.

As for the perennial option of boosting inventory to buffer against disruption, doing so "even slightly to provide a cushion against supply disruptions can cost big companies millions of dollars, taking a noticeable bite out of the bottom line," the Journal says. 

Costs, benefits, and strategy

Last year, Far East manufacturing centers experienced two high-profile natural disasters that highlighted for manufacturers and supply chain and operations managers the pressing need for risk mitigation strategies. I'm referring, of course, to the March earthquake and tsunami in Japan and the autumn floods in Thailand. The events exposed serious vulnerabilities in many organizations' supply chains, from automakers to producers of hard drives. They also showed companies what happens when a supply chain isn't built to withstand a severe disruption to a key supplier.

The recent Wall Street Journal article "Reinforcing the Supply Chain" scrutinizes some of the supply chain activities of companies in the aftermath of Japan and Thailand. In Japan, representatives from an electronics manufacturer called Jabil "met with most of its major Japanese suppliers to encourage them to develop more than a single source for parts and raw materials ... [They] also urged them to stop clustering their factories around their headquarters."

Erich Koch, chief supply chain officer for Jabil, says that natural disasters make dual sourcing one of the company's highest priorities. But are such efforts justifiable to investors and stakeholders? According to the Journal, "Backstopping doesn't pay off unless there is a disaster." As for the return on investment, "If we're lucky, absolutely zero," says Sean Cumbie, global supply chain management vice president at German-based Qiagen NV.

As for the perennial option of boosting inventory to buffer against disruption, doing so "even slightly to provide a cushion against supply disruptions can cost big companies millions of dollars, taking a noticeable bite out of the bottom line," the Journal says. 

The Wall Street Journal article got me to thinking about what may be perceived as conflicts between overall business priorities and operational concerns. The article discusses dual sourcing, which is defined by the APICS Dictionary as "a method for sourcing requirements by using a few suppliers for the same products or services." While dual sourcing mitigates the risk of supply failure, it is often more costly to achieve redundancy. Dual sourcing may be at odds with the overall business strategy if a priority is placed on reducing operational costs.

In recent columns, I often have discussed how company leaders who anticipate risk gain a critical advantage if disruption occurs. However, it is incumbent on supply chain and operations management professionals to consider business priorities when developing risk mitigation tactics. The truth is there are no easy answers to determine the exact actions a company must take to mitigate supply risks. This is where strategy meets operations. Traditionally, supply chain and operations management is a field focused on tactics. But there is increasing demand on our professionals to become involved in high-level decisions, such as those needed to manage sales and operations planning, sustainability, the supply chain, and risk.

APICS is increasingly emphasizing the role of supply chain and operations managers in developing, evaluating, and implementing strategy. You will find extensive content on supply chain strategy and supply chain risk in the APICS CPIM and CSCP programs, APICS publications, APICS research, and APICS conferences. It is time for you to hone your knowledge and skills in these areas. Look to APICS to help.  

In other news

How APICS Operations Management Now

  • What risk mitigation strategies are in place at your organization? What are your organization's primary risks?
  • What do you think of some of the strategies discussed in the Wall Street Journal article? How effective and cost efficient are they?
  • How do you approach higher-level questions of strategy in supply chain and operations management?