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Without Safety Nets

Will super-efficient supply chains take one beating and fail to keep on ticking?

The series of hurricanes that hit Florida recently, the threat of volcanic eruptions in the Canary Islands that could disrupt Atlantic sea traffic, the August 2003 East Coast power blackout, and similar catastrophic natural and artificial events underscore the increasing vulnerability of supply chains. Having designed and implemented numerous global supply chain management (SCM) systems, I've grown increasingly alarmed by the efficiency and effectiveness of these systems in achieving their business goals. But before you think I've lost my sanity, please read on! The very success of SCM information technologies in delivering business value is making the supporting supply chains fragile. In my opinion, super efficient and effective supply chains will take one beating and fail to keep on ticking! Let me explain this with a circus analogy.

Older readers may recollect that the most exciting and nail biting event in a circus show was the high-wire balancing and aerial trapeze acts. What made these acts especially exciting was that the height at which they were performed was progressively increased as the show went on. For the climax, the safety net under the high wire and trapeze was removed and the acrobats performed without a safety net. Only the most skilled circus artistes would perform without a safety net, as it required absolute precision and concentration and nothing could be left to chance. It made for an exciting, edge-of-your-seat experience. A series of unfortunate accidents — where gravity prevailed — put an end to performing without safety nets in most of the civilized world.

Efficient global supply chains enabled by superior SCM technologies are similarly performing high-wire acts without safety nets. But first, let's review how SCM delivers the goods in order to set the stage for examining these vulnerabilities.

The SCM Value Proposition

Where implemented properly, SCM technologies have delivered significant business value. They let companies exchange information for inventories, such as reliable production schedule data with supply chain partners to reduce the need for excess inventory. This inventory reduction across the supply chain has resulted in substantial savings in working capital commitments. The risk from reduced inventories is that in case of catastrophic failure at any one point in the supply chain, there isn't sufficient inventory to tide companies over until the failure is rectified.

SCM technologies have allowed better visibility and control over the procurement function. As a result, suppliers have consolidated — from dozens of vendors to one or two — with reductions in cost and improvements in quality. While reductions in cost and improvements in quality are good things, it makes the supply chain vulnerable. If any catastrophic event occurs at the consolidated suppliers' facilities, it would take considerable cost and effort to replace the that supplier.

Other benefits of SCM technologies include the following: reduce the amount of lead time needed to order raw materials across the supply chains, allow outsourcing of non-value added functions, and manage complex and multicontinent supply chains. These benefits translate financially into reduced costs and improved operating efficiencies. In other words, SCM technologies make a company's supply chains lean and mean.

The lean-and-mean supply chain enabled by sophisticated SCM technologies unfortunately doesn't have the slack to recover from catastrophic events at any point in the supply chain. Reduced inventories, supplier consolidation, compressed lead times, warehouse and logistics consolidation, outsourcing, and managing long and complex global supply chains without a business continuity plan (BCP) is the equivalent of performing the supply chain high-wire act without a safety net.

Business Continuity Planning

When I first wrote about this problem ("Awake in the Dark", Jan 1, 2004), I received a lot of email comparing supply chain vulnerability assessment and contingency planning — or more simply BCP — to the "Year 2000 boondoggle." Some readers complained that I was creating fear, uncertainty, and doubt to generate new consulting opportunities. I wish that were the truth.

Since then, Cranfield University and the Supply Chain Management faculty at Michigan State University have conducted research and published papers that supported the basic premise that the more lean and mean a supply chain gets, the more vulnerable it becomes to supply chain disruptions. A well thought out and practical BCP provides resiliency to the lean-and-mean supply chain.

Think of supply chain resiliency as the safety net under the high-wire act. Even if a performer makes a mistake and falls to the net, the act can continue after a brief break with the same performer or a substitute. Similarly, after a catastrophic disruption, a resilient supply chain can be restored to its original or desired state through the effective application of a BCP.

Elements of a Business Continuity Plan

The IT group is essential to the development of a good BCP. The IT function understands complex supply chain processes and the supporting information technologies. The first step to creating a plan is to identify which areas are most vulnerable to supply chain disruptions. For example, if a key raw material input were supplied by one supplier, then that would become a significant source of risk in case of disruptions. IT must study other areas within the supply chain and rank them according to potential risk.

These rankings are based on a risk's potential impact on revenues and costs. Then contingency plans, such as identifying alternative supply sources, signing back-up shipping companies, and so on, are developed to address the risks. Developing these contingency plans can be a complex process requiring subject matter experts from all functions within the company and across the supply chain to participate in developing a workable BCP. And while many corporations have BCP departments, the focus of these departments to date has been on tactical operational issues, not complex global supply chains.

Real and Imminent Threat

Supply chain management technology offers business benefits from reduced inventories, compressed lead times, reduced cycle times, and efficient and complex global supply chains. But these positives can turn quickly into a sea of red ink if there isn't a workable business continuity plan in place to deal with supply chain disruptions. As the modern corporation becomes increasingly global, supply disruptions can come from any corner of the world. An earthquake in Taiwan or a power outage in the Northeast United States can throw a lean-and-mean supply chain out of commission for significant periods of time. Only the companies that have carefully planned for and built resiliency into their supply chains will be able to recover quickly and also prosper.

Ram Reddy is the author of Supply Chain to Virtual Integration (McGraw-Hill, 2001). He is also the president of Tactica Consulting Group, a technology and business strategy consulting company.

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