“Customers don’t care why or where the disruption occurred; they still expect the final product or service to be delivered at the right time and price” (Elkins…Craighead, 2005). The following quote sums up nicely the expectations that modern consumers have for retail products. When we visit a Best Buy, we expect laptops to be available for us to purchase. When we buy a product from Amazon, we expect it to arrive at our doorstep within a couple of days. This is the high expectation that we have for any retail company. For the supply chain managers of these companies, it is their responsibility to make this possible. Whether there is a flood, an earthquake, or even a terrorist attack, consumers will to go shopping with the hope to find the products they need.
When the Japanese earthquake and Thai flood happened in 2011, many companies realized how weak their supply chain was. Even major corporations like Dell were having a hard time supplying enough hard drive for its computers. The main reason companies have come to this situation is mainly because more organizations have adopted a lean supply chain management that has resulted in a more networked, highly dependent organizations (Oke and Gopalakrishnan, 2008). When a problem occurred in one part of the supply chain, it affected the entire end-to-end supply chain. In a way to better prepare for future disruptions, the focus was put on supply chain risk management. In order to analyze supply chain risk, risk is first categorized and then an appropriate mitigation strategy is developed for each categorization.
First, risk can be found in any part of the supply chain flow. Thus, if we consider the entire process, we can classify it by supply risk, demand risk, and miscellaneous risk. According to Oke and Gopalakrishnan’s article, supply chain risks should be matched to the right level of demand and supply risks encountered. Thus, within each classification of risk, it can be further categorized to ‘high-likelihood, low-impact’ risks, ‘low-likelihood, high-impact’ risks, and ‘medium-probability, moderate-impact’ risks.
In order to ease the consequences of these risk categorizations, proper risk mitigation strategies should be put in place. These strategies are generally classified as either generic or specific. Generic strategies are those that are considered as ‘one-size-fits-all’ and are capable to cope with any type of low-impact risks. Commonly, better planning and forecasting are considered generic ways to mitigate these types of risks. On the other hand, specific mitigation strategies are used for medium to high impact risks. These strategies fit a specific type of category of risk. For example, in the WSJ article, Qiagen will start using additional UPS warehouses in Singapore as a strategy to mitigate future risk of supply disruption in Japan. This shows how Qiagen is preparing a more redundant strategy for the chance of another earthquake (or natural disaster) near its Japanese warehouses.
To further explain how the different types of risk fit in the different stages of the supply chain, we can start by considering supply related risks. Within supply risks, an example of high-likelihood, low-impact risk would be holidays in your supplier’s country. Especially since there is a long new year’s holiday in China, a company with a Chinese supplier should prepare for a small supply disruption during this period. Since holidays are set days within the year, this type of disruption should be well prepared for and properly mitigated. However, worse situations could occur within the supply flow. A company could be affected by man-made/natural disasters or even lose a major supplier. If a company loses a key supplier due to unforeseen circumstances, this will have a huge impact for the entire end-to-end supply chain.
For demand related risks, a common one that many companies have had to face over the past couple years is the economy. As people are less willing to go out and spend money, companies have had to adjust their forecasting, and adjust to the slower demand. On a similar note, demand related risks can also be seen through demand variability and unpredictability. This is especially common for fashion products. When clothing companies release a new product, it is hard for them to forecast and plan appropriately for the demand.
There are a lot more risks that are not included in the supply or demand related risks. These are commonly all grouped under miscellaneous risks as they tend to increase the cost of doing business. Since these types of risks don’t occur too often, and don’t have too high of an impact, they are normally categorized as medium-probability and moderate-impact risks. One example of this type of risk would be a price hike in a commodity that a company uses. If the price of rubber increases, a bike company might experience increase in their expenses. This will ultimately cut into their profit margin, and potentially not allow them to meet their cost reduction goals. Ultimately, companies need “specific mitigation strategies…to cope with miscellaneous risks that tend to increase the cost of doing business in a retail supply chain. These strategies are focused on efficiency gains and cost reduction initiatives” (Oke and Gopalakrishnan, 2008). Another article goes even further to distinguish between strategic and operational level planning. The main difference between the two would be that strategic should be more of a proactive risk management whereas operational level planning is more of a reactive risk management.
Other ways that a company could focus their efforts on to improve their mitigation strategies are to work closely with their supplier. Bigger corporations who have more leverage over their suppliers could “require critical supliers to produce a detailed disruption-awareness plan and/or business- continuity plan” (Elkins…Craighead, 2005). Overall, this would allow more visibility in the supply chain, which allows a firm to better understand and manage material flow. In the long run, this type of transparency and increase in communication will prevent any type of bullwhip effect along the supply chain.
With recent natural disasters and political instabilities that caused major disruptions in supply chain, companies have realized the importance of supply chain risk management. More attention will be focused on how to mitigate potential disruptions for the future. Through a proper corporate culture, an accurate control system, and a more resilient supply chain, companies will be able to better position themselves with a stronger supply chain in place.
As Sheffi and Rice Jr. mention in their article that “risk management should be a strategic initiative that changes the way a company operates and that increases its competitiveness.” This is pointing out that in order for a company to have a proper risk management in place, they need to change how they operate their day-to-day operations as well. Every step in their process should take into consideration the possibility of a disruption. This will allow both the system and employees to be more flexible and adaptable.
Having the right culture in place also helps to put the right control system in place. Ideally, a control system should detect a disruption quickly and foster speedy corrective actions (Sheffi and Rice Jr., 2005). With an adaptable risk-oriented mindset, the control system will allow a company to have the right controls in place. By having a system that is quick to respond, that allows the company to save that much more cost and reduce reputable damage. For example, if utility companies in the east coast had better control systems in place during hurricane Sandy, they would have been able to respond much quicker after the crisis. However, since they had such an outdated risk management in place, it caused millions of residents to go days without electricity. It not only led to major inconvenience for the citizens, but it also ended up hurting the reputation of these power companies.
Through both a proper culture and better control system, companies are able to develop a more resilient supply chain. They can further increase their resilience by creating redundancy or increasing flexibility. The article mentioned how a redundant supply chain is really hard to sell to the CFO or CEO of a company as it does not deliver any visible financial benefits. By building another factory in Malaysia, in addition to one in Japan, a company only gains that benefit in the time of crisis. For many executives who are judged by the stock price, this long term vision is pretty hard to carry out. A flexible supply chain can be better applied as this can be implemented in the business’s day-to-day operations. A company could train its employees to cross-trained for different teams, which will allow workers to adapt to the change in demand. These simple training programs can go a long way to help save a firm from a supply disruption.
Ultimately, by appropriately categorizing risks and developing strategic risk mitigation strategies, companies will be able to prevent any future lost sales while also protecting their reputation during the time of crisis. During hurricane Sandy, Goldman Sachs was one of the only buildings that had electricity throughout the whole crisis. Proper planning and a risk-oriented mindset allowed the company to better prepare for the storm. Not only were they able to continue doing normal business, but they also gained better reputation as they shared their electricity with neighbors who had to charge their cell phones. These types of strategies show how a proactive strategy can prove to be extremely beneficial for low-likelihood, high-impact risks.