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Preparing for a Rainy Day


Friday October 2, 2015

How many events happen in seven-year cycles? Most birthdays and holidays happen every year, lunar eclipses can be seen from a given geographic location about once every 2.3 years, and the Summer Olympic Games and leap years happen every four years. Stumped? As it turns out, in the last 50 years, major financial quakes have occurred every seven years, on average, according to The Wall Street Journal. And, in case you’re doing the math, the last major financial downturn, which was in October 2008, was seven years ago.

Bruce Arntzen, senior research director of the Massachusetts Institute of Technology Center for Transportation and Logistics, writes in the article that companies have made great strides to prepare for supply chain disruptions brought on by natural disasters or man-made crises, but business leaders do not worry as much about financial recessions.

“One reason for our lack of preparation is that it’s easy to become lulled into a false sense of security,” says Arntzen, who also serves as executive director of the center’s supply chain management program. “It seems that crises keep coming along that could tip the global economy into recession, yet we always seem to avoid Armageddon. The flood of Syrian refugees into Europe, China’s economic slowdown and the financial meltdown in Greece have caused much hand-wringing this year, for instance, but no global recession—at least not yet.”

However, Arntzen notes that the economy is fragile right now, pointing to the US Federal Reserve System’s recent decision not to raise interest rates “for fear of cutting off today’s tenuous growth.” Although investors and corporate planners recommend riding out the storm, supply chain management professionals should prepare for the storm.

The first step is to remember how customers behave during a recession: They stop buying and cancel orders. Companies that purchase industry-standard raw materials might be able to put their pipelines on hold, but those that require more unique materials often are stuck accepting the delivery and paying the bill, Arntzen writes. This creates a working capital bulge and can quickly squeeze profits, which can result in downsizing or closing the business altogether.

With proper risk management, many of these issues can be avoided or at least subdued. Specifically, Arntzen recommends using industry-standard parts, creating a variable-cost structure so that operations can be scaled down if demand decreases, and building flexibility into your workplace to adjust production as needed. In terms of customer and vendor relationships, he recommends enforcing payments during good times and using “risk-aware contracts that include time fences for the transfer of ownership of long lead time items, provisions for sharing information and risk, and cancellation penalties.”

Managing the risk

Whether planning for an economic recession or other disruption or coordination risks, supply chain professionals need to keep risk management in mind in order to keep their businesses afloat. According to the APICS Operations Management Body of Knowledge Framework, there are three steps to effective risk management: Identify sources of potential disruptions, including unlikely but possible ones; assess the potential impact of the risk; and develop plans to mitigate the risk.

The APICS Risk Management Education Certificate can prepare you to develop a global risk mitigation strategy. With this certificate, professionals show that they are committed to protecting their employers from supply chain risk and are able to balance rewards and risks in the decision-making process. To learn more about the certificate, visit the APICS Risk Management Resources center

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