Supply Chain Frontiers issue #41
The tsunami that devastated northern Japan and wreaked havoc on the world’s third-largest economy delivered a shocking reminder of the vulnerability of supply chains to catastrophic disruptions. Other recent examples of such calamities include the earthquake that struck Haiti in 2010 and Hurricanes Katrina and Rita in 2005.
In light of these experiences, what supply chain skills are needed to be prepared for large-scale disruptions and to recover quickly when disaster strikes? And who in the organization should take the lead in developing response strategies?
All supply chain managers are risk managers in the sense that they regularly deal with risks across the supply chain. They hedge demand uncertainty with extra finished inventory or additional capacity, and guard against supply uncertainty with dual sourcing and raw material inventories. Supply chain managers buffer the organization against unreliable manufacturing operations with multiple production lines and plants.
While these areas of expertise are invaluable in crisis situations—and underline the supply chain’s critical role during emergencies—companies with complex supply chains also need dedicated risk management resources. A supply chain risk manager (SCRM) should take the lead in developing business continuity plans and assessing the risks throughout the supply chain.
The skills required to fulfill the SCRM role are reflected in the activities that need to take place both before and after a disruption hits the organization.
The secret to successful response to disruptions is to prepare before the event occurs. To do this effectively, the SCRM needs to address some critical questions: What disruptions could happen? And how would these supply interruptions affect the business? Most important, this individual also must consider both the possible sources of a disruption as well as the associated end states—and recognize that these scenarios represent different challenges.
A common pitfall is to focus too much attention on common disruptions, and neglect those that are infrequent but can cause a great deal of damage. A recent survey by the MIT Center for Transportation & Logistics (MIT CTL) of 1,500 supply chain managers asked these individuals to rank a list of 25 risks from most frequently to least frequently occurring. They judged supplier failure to be the most frequent risk event and earthquakes as the least frequent. The next question asked them to rank the importance of these same 25 risks to their supply chain. The rank ordering of importance was almost identical to that of frequency.
The survey results strongly suggest that the respondents were using one metric, frequency, to judge the importance of a disruption. They were paying less attention to the severity of the impact, and hence assigning less importance to large-scale disruptions such as earthquakes.
Having identified the types of disruptive events and potential impacts, the SCRM can then develop appropriate contingency plans. What actions can be taken to ensure that the business continues to operate even if it loses the ability to produce, ship, communicate, and secure supplies, for example?
Still, back-up plans alone are not enough when responding to a severe disruption. The SCRM also should establish resources, such as emergency response centers (ERCs), communications systems, chain-of-command structures, and business continuity plans, which can be activated when the enterprise is thrown into a crisis.
Finally, the supply chain risk manager must help to educate employees and increase awareness of emergency response practices.
After a disruption, the focus shifts to recovery and implementing contingency actions. The key is to react quickly; companies that delay not only risk a lengthier recovery, but also have more difficulty securing scarce production capacity that has already been taken by nimbler players. The ERCs should be staffed by key functions that typically come under the supply chain umbrella, such as procurement, operations, and distribution. The SCRM directs the overall effort, though he or she may or may not be a part of the team.
These functional experts are the central coordinators for the supply chain response. They need knowledge and skill sets that may not normally be part of the supply chain risk manager’s make-up. For instance, they need to be intimately familiar with the business continuity plans established by the planning group. And they should be able to interpret the plans quickly and adjust them as needed, depending on how the situation is unfolding. This type of decision-making requires the ability to work under extreme pressure with limited data, and to coordinate across many parties in the supply chain. Emergency responders also need to be excellent communicators.
Mercifully, disruptions on the scale of the tsunami that ravaged Japan are few and far between. But that does not mean that supply chain organizations should ignore the possibility of being affected by such disasters.
This is an abridged version of a column by Dr. Bruce Arntzen, Senior Research Director, and Jim Rice, Deputy Director, at MIT CTL, published in the May/June 2011 issue of Supply Chain Management Review (www.scmr.com). Contact the authors (email: barntzen@mit.edu, jrice@mit.edu) for more information.