Weathering the Storm, Part 2: The Balancing Act of Supply Chain Risk Management

Weathering the Storm, Part 2: The Balancing Act of Supply Chain Risk Management

By Justin Willbanks

In Weathering the Storm Part 1, I wrote about preparedness of operations during times of natural disasters. I focused primarily on meeting the demand of rebuilding efforts in a timely manner while also keeping up with normal order volumes. While this is priority number one for most facilities that are called upon to help, there is another risk that poses both short and long term threats to many organizations. The ability for many of today’s global supply chains to mitigate the risk associated with natural disasters occurring around the world is one that can be both expensive and a tough sell to upper management. Although the financial impact these disasters can pose could cause irreversible harm to many companies, many leaders aren’t comfortable spending a lot of money to protect against potential situations that may or may not ever happen. When you combine this with the uncertainty of where and to what extent a disaster may occur, it’s difficult to decide where to focus valuable resources. Following are several commonly used techniques to help minimize the effect these disruptions have on supply chains.

Sourcing Diversification

With the vast amount of disruptions and the accompanying uncertainty around where they may occur, one popular technique is to spread the sourcing of parts and raw materials among multiple suppliers in varying geographical regions. The idea here is obviously to reduce the chance that all are affected by any one natural disaster and increase the company’s ability to lean on others to pick up unfulfilled demand. An example would be utilizing three primary suppliers for a particular raw material with 60% coming from one and 20% coming from each of the others. The key here is that any 1-2 suppliers have the capacity to meet the additional demand and that they are located in varying geographic locations.

Supplier Compliance

In addition to diversifying where materials and products are sourced, extensive research should be put into ensuring these suppliers have all taken similar steps in their own supply chains. Tier 2 and 3 suppliers are just as critical to a company’s success due to their impact on tier 1 suppliers.

Inventory Buffering

Another technique to combat potential supplier disruptions is to carry additional inventory for materials being sourced from high risk regions or during high risk seasons (i.e., hurricane season). There are obviously several drawbacks to this approach. Outside of the carrying costs associated with additional inventory, there is also an increase in the chance for inventory to become obsolete. It can also expose facilities to additional loss in the event they themselves are affected by the disaster, so companies electing to use this method should do so only after careful consideration.

Cost vs. Loss

With so many facets to supply chain risk management, it can be easy to overlook what the overall purposes of being prepared are. It’s important to understand the value of the proposed risk to fully understand if the control measures are worth it. The old adage “Don’t spend a dollar to save a dime” seems appropriate right about now. Through a combination of extensive research and reviewing past experiences, costs should be compared for each risk and control measure to determine the viability of each. And if we’re taking a company’s public perception into account, breaking even or even losing a little is probably worth it in the long run.

Although most of these methods are widely used by a number of companies today, this is in no way an exhaustive list. In looking at high-profile disasters in the past that wreaked havoc on supply chains (2011 earthquake/tsunami in Japan), we can also see that it is often difficult to account for every possible scenario. And in worst case scenarios, it’s more about minimizing downtime rather than avoiding it altogether.