Supply Chain Frontiers issue #30. Read all articles in this issue.
Supply chain is adjusting to the extreme turbulence that has become the new norm in most markets, but how is it evolving to meet these challenges in a post-recession world? Perhaps towards a role as shock absorber, one that smoothes out the countless market jolts that buffet companies and helps to keep the enterprise on its chosen strategic track.
This new role fits supply chain’s evolutionary path over the past one to two decades, said Dr. Chris Caplice, Executive Director of the MIT Center for Transportation & Logistics. Supply chain began as a series of silos in which component functions such as transportation and warehousing operated separately as fiefdoms. As the lines between the silos blurred, companies began to make trade-offs between these functional areas to increase efficiency. The third stage in the progression shifted the focus externally as companies looked to the extended supply chain for better ways to operate. “We are now entering the fourth stage, the shock absorber stage, where companies are starting to make trade-offs across the end-to-end supply chain,” said Caplice.
In this phase, the benefits of resilience and risk management are gaining ground. As a result, organizations are coming to realize that the optimum supply chain solution might not be the lowest-cost option. “If you treat supply chain purely as a cost center you are limiting its ability to compensate for the countless unpredictable changes which companies now have to deal with,” Caplice said.
Think of a high-tech shock absorber that is wired into every operational area of the company as well as its corporate strategy. When a disruption occurs – whether it’s relatively minor such as a late shipment or severe such as the failure of a major supplier – supply chain quickly senses the competitive implications and takes remedial action before the problem inflicts serious damage. For example, the shock’s destructive potential might be dissipated through buffer inventory that offsets a shortage of product, or a switch to an alternative vendor to avoid a loss in market share.
In addition to shielding the organization operationally, supply chain also takes actions that are aligned with the organization’s strategic goals. And when these goals change, it re-programs to take account of the shift.
The shock absorber can also be programmed to flex with projected disruptions. At MIT CTL’s New Perspective on Managing Risk Through the Supply Network symposium (December 2, 2008), biopharmaceutical company Genentech explained how it is building network risk management into its business processes. The company has identified 14 hazards to which it is vulnerable and the probability of each one occurring. Using inventory, back-up production capacity, or a combination of the two as mitigation measures, Genentech is becoming more responsive to outage situations; it is, in effect, programming its supply chain to absorb the shock of a crisis and maintain service levels. Moreover, the effort is tied to the company’s corporate mission that “no patient goes without,” because some of the drugs Genentech makes are used to treat life-threatening illnesses.
This is also an example of how the shock absorber supply chain can proactively capture competitive advantage. If Genentech’s supply chain is programmed to react to certain emergency situations, the company can gain ground on competitors that are less well prepared when such disruptions occur. “It can be used as a shield to buffer the company against something changing dramatically, and given the increasing volatility of markets across the globe, this is a powerful competitive weapon,” said Caplice.
Supply chain visibility and transparency enable companies to be more proactive competitors, and a shock absorber that is wired into the organization on multiple levels provides these qualities. For example, when a process improvement in one part of the organization is leveraged across the enterprise, this multiplies the competitive payback. The process improvement could be a reduction in cycle time that lowers manufacturing costs. The demand planning team then uses the shorter manufacturing cycle to generate more accurate forecasts, opening the door to new service offerings. “These benefits are only realized if a receptive supply chain can identify these opportunities and determine where they can be leveraged,” Caplice said.
The future role of supply chain will be explored at the Crossroads 2009: Managing Supply Chains in Turbulent Times conference, March 26, 2009, Cambridge, MA.