We're Getting Faster, Leaner, and More Spread Out
past two decades have witnessed dramatic improvements to supply chain performance
through lean manufacturing, just-in-time (JIT) inventory, ever-increasing velocity,
extreme outsourcing, and related transformations. In the ten years from 1992
to 2002, the ratio of inventories to shipments in the US fell from 1.65 to 1.35
(see figure 1). These are enormous numbers in the context of our multi-trillion
the same time, the complexity and length of supply chains have increased due
to ever-greater out-sourcing and globalization. This is evidenced in the upward
trend in the average length of haul for freight across almost all modes, over
the past forty years (figure 2).
Average Length of Haul for Domestic Freight
the material is acquired and integral processes are performed by a network of
many dozens of "virtually integrated" firms, each master of its own specialty.
We are getting more spread out, not just geographically, but also organizationally.
Supply Chain Brittleness and the High Cost of Glitches
no turning back to the old ways of doing things. These faster, leaner, more
virtual chains have resulted in increases in productivity, as well as improved
service levels. However, these improvements can sometimes come at a cost—increased
brittleness of supply chains. Reducing inventory and building everything just-in-time,
without taking steps to improve flexibility and resilience means that disruptions
in the supply chain can quickly become expensive disasters.
design and manufacturing are outsourced, it makes companies more vulnerable.
If your contract manufacturer's line goes down, it is your line going down!
If your key supplier's design doesn't work, it is your design that's now broken.
In the move to extreme outsourcing, we've already seen many stumbles. "Throw
it over the wall" approaches present new challenges to cope with.
globalization of logistics adds yet more risk. Setting aside things like political
upheaval or terrorism, just the everyday complexity of multi-mode, international
logistics increases the chances of something going wrong at border crossings
and hand-offs, and makes tracking all the more critical and challenging.
are also doing more postponement, often involving in-channel assembly and sophisticated
merge-in-transit operations. This requires coordinating goods in motion—multiple
components that need to arrive together in precise time windows to be combined
into the final product. If something goes wrong with even one delivery, then
the whole order is late.
high cost of supply chain disruptions was starkly highlighted in a study by
Kevin Hendricks and Vinod Singhal. They found that each significant supply chain
disruption resulted in, on average, -40 percent loss in shareholder value. The
impact on operating income and ROA was even more dramatic (see figure 3).
is well understood that expediting costs—increases in the cost of raw materials,
as well as transportations costs—fines and penalties, as well as lost business—result
from poor coordination in the chain.
course, there is the upside opportunities that can also be overlooked. A great
product takes off, your competitors are witnesses, and move to counter your
offerings, often approaching the same suppliers, creating scarcity of supply.
you need to create a smarter strategy to deal with the upside and the downside
of the supply chains.
Average Changes to Profit and Returns Associated with Supply-Chain Disruptions
The Resilient Supply Chain
these trends and the high consequences of glitches, the basis of competitiveness
is shifting. It has become imperative to build more resilient supply chains—chains
that are not just lean and fast, but that can also respond to disruptions, upsides
and hard-to-predict events. There are an almost infinite variety of disruptions
that can afflict a supply chain. Here are a few examples:
Supplier failures (financial, production, design, etc.)
Work stoppages—Labor disputes
Infrastructure outages (fire in plant, power grid down, etc.)
Unanticipated demand surge or drop-off
Unanticipated supply constraints, allocation, price increases
Price, currency, and interest rate fluctuations
one at a time, disruptions appear to be rare, unpredictable, and often one-time
events. However, in aggregate, disruptions are not rare. They happen almost
continuously in any major supply chain. While they may not be predictable individually,
it is possible to build resilient supply chains designed to mitigate and proactively
deal with many of these risks.
time to change the way we think about risk management. The traditional view
looks at risk management investments as insurance policies—necessary cost burdens
that don't contribute to corporate performance. With a broader view, we see
that disruptions, in particular mismatches in supply and demand, and logistical
problems, happen every single day and seriously affect a company's performance.
Effectively implementing risk management techniques dramatically improves a
company's performance (lower total cost and higher service levels) compared
with the traditional approaches that don't adjust well to unpredicted events.
Elements of Resilient Chains
So how can we build resilient chains? It is important to strengthen and build flexibility into the links in the supply chain. This means crafting formal and informal agreements between trading partners that can evolve over time and adapt to unforeseen changes. It requires a broad based approach to managing risk, as illustrated in table 1.
1- Elements of Resilient Chains
that adapt to market changes and evolving needs
relationships, vetting, proactive supplier performance monitoring and
of supplier problems, early awareness of supplier problems and rapid corrective
exception alerting (supply delivery, contract mfg, logistics, etc.)
awareness and rapid correction of issues at all stages of the chain
single point of failure
Risk Management and Predictive Business Intelligence
assessment, prioritization, contingency planning
of limited risk management resources. Rapid response when things go wrong.
and monitoring early warning indicators and systems for disruptions of
Crisis avoidance or reduction.
intelligence, forward-looking, predictive analytics
pre-emptive strategies. Proactive execution.
and Design Practices
preparedness for upside and downside demand risks
using common parts, SKU de-proliferation
to meet variety of demand scenarios with given amount of inventory
reduction, postponed differentiation
plants that can build a variety of mix and volume. Plants that can evolve.
Common design platforms.
demand-supply matching risk. Flexibility to quickly adapt to immediate
demand changes and longer-term product changes in markets
to ramp volumes. No single point of failure
The Next Frontier
chains have evolved and continually improved over time. These improvements have
tended to come in waves that build on previous advances. It takes a blend of
strategies from relationship management, technology, smarter manufacturing,
and logistics strategies. As you think about building a resilient approach,
ultimately it will allow you to succeed at lean yet responsive approaches to
the market place. Building resilient chains is the next frontier.
Evolving to Resilient Supply Chains
world is a chaotic, ever-changing place with an ever-accelerating pace. Product
lifecycles continue to shrink. Disruptions are the norm, with fewer buffers—in
time, capacity or inventory. So, while building resiliency in the supply chains
processes, they will thrive and out-perform their competitors. Understanding
the risks and managing to avert them can prevent unplanned cost and improves
total performance. As the inventible disruptions occur every day in supply chains
(as in life), those that are the most resilient will win by a long shot.
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