- THE MAGAZINE
When most of the nation was scrambling to recover from damage after Superstorm Sandy, UPS had, by taking steps to mitigate risk and loss, positioned itself to continue in stride after the storm.
Dave Zamsky, vice president of UPS Capital, explains how UPS was able to prepare for the storm and mitigate supply chain risk: “Superstorm Sandy was a case study in mitigating supply chain risk,” he says. “With a hurricane, you at least have some advance warning. Anticipating the storm would be severe, we worked with our clients to move critical freight ahead of the storm and to identify alternate locations/suppliers to divert shipments, where feasible. For one of our home improvement retail customers, we repositioned inventory and shipped 90 truckloads of fast selling hurricane supplies (e.g., bottled water, gas cans, etc.) on the Friday before the storm. For a major automotive manufacturer, we worked to identify the most critical inventory and began to pull ahead material from suppliers in the path of the storm.”
Supply chain risks exist on a broad spectrum. They can range from natural disasters, political instability and financial crises to volatile fuel prices and shipping costs, shipping delays and fluctuating consumer demand. Some risks, such as a significant natural disaster, can result in immediate supply chain disruption. Others, like fluctuating consumer demand, won’t change a supply chain overnight but can slowly degrade competitiveness and profitability if they are not addressed.
One of the most paramount risk factors companies experience every day is the dizzying pace of consumer demand in virtually any place in the world.
“In the past few years, we have seen a major shift to a direct ship, consumer-driven supply chain,” says Zamsky, which provides financial services to businesses whose supply chains span international borders. “This is creating major supply chain pressures. Customer demand must now be met with on-the-fly orders that go directly to consumers. With more just-in-time deliveries that the supply chain needs to execute, there is less room for error.”
In addition to this, there is increased supply chain risk for highly perishable items with limited shelf lives such as foods and medical supplies and for high-value items like jewelry and precious metals. Many of these goods are environmentally sensitive. Their shipment containers must be continuously monitored for temperature and humidity fluctuations. These goods are also time sensitive, with their entire value in jeopardy if there is a delay of entry at a port and the supply chain logistics are not agile and responsive enough to reroute the goods if required.
“We can mitigate supply chain risk if we use more effective ways of monitoring shipments and of responding instantly to shipment problems when they occur,” says Zamsky. “When there is a delay at a port of shipment, it is possible that the goods transport mode can be changed to air. If there is an environmental failure in a container, another container might be called into service. There are always ways to mitigate the problems that occur in the supply chain if companies plan for the possibility of these occurrences in advance. If they do that, they can reduce the risk.”
The question is, do companies take proactive steps to reduce their supply chain risks?
“Contingency planning and risk are popular topics, but even very large enterprises tell me they don’t factor in risk,” says Jeffrey Karrenbauer, president and founder of Insight, which consults in business analytics and the supply chain. “What businesses tell me is that they already know what to do if a disaster strikes. They’ll get together around a conference table and determine next steps, and most feel that this strategy will work pretty well. … The other thing they tell me is that they don’t factor in having a formal risk or business continuation plan because they believe it is very unlikely a major disaster will ever impact them. Instead, they tell me they have a phone tree that they’ll use in any disastrous circumstance.”
Many of these supply chain and other end business executives regard contingency planning and risk management as IT concerns, since so often it is system outages that produce downtime and supply chain slowdowns. These non-IT executives and managers also are not typically assessed in their performance reviews for risk and contingency preparedness — as their IT counterparts are.
Nevertheless, there are catastrophes like the 2011 tsunami that struck Japan. The tsunami was anything but an IT outage. During and after the tsunami, there was little any IT disaster recovery and business contingency plan could have done to mitigate what had happened, nor could an IT-centric plan have changed the fact that the electronics industry needed months to recover from supply chain disruption that the tsunami had caused. The impact was severe since 31.5 percent of the global electronics supply for automobiles had been coming from Japan at that time. The costs in lost revenues and the brand damage that resulted were incalculable.
“In the current world, with increasing demand on customer experience and service levels, the risk points for each supply chain are situations that prohibit or limit shippers from fulfilling their orders, resulting in lost sales, production stops or other significant areas of impact in their customers’ process,” says Arthur VanGerven, senior director of business development at Menlo Logistics, Europe, which specializes in supply chain integration and optimization. “Root causes can be wide and found in several nodes and processes in the supply chain, internal and external. … Other significant risks for commercial supply chains can be found in the financial area (e.g., waste that does not add value or that reduces value in the supply chain) or puts the output at risk (e.g., supplier performance and control of internal costs). A third significant risk is noncompliance with laws and regulations that are more and more impacting the way that supply chains are managed and controlled.”
Preparing Yourself for Supply Chain Risk
The concern, as presented by Insight’s Jeffrey Karrenbauer and others, is that companies aren’t doing enough to manage and prepare for the risks in supply chains that are getting longer and longer, with more areas of the world to both source from and provide to.
“Companies are not prepared,” says Dave Zamsky. “In a University of Tennessee survey on supply chain risk management, 90 percent of those surveyed did not quantify their risk when they looked at their supply chains. When they were asked about whether they had a documented risk management assessment, none used outside help to get the documentation done. Most survey respondents answered that their companies had a risk management person, but that this individual was not in the supply chain area. They also reported that they had general business insurance that was negotiated by their finance and accounting group — but not specifically for the supply chain.”
Even scarier is Karrenbauer’s finding that, when asked, a large portion of Fortune 5 company executives say that they have “phone trees” in place when disaster strikes, and that they believe that getting together at a conference table and hammering out an on-the-spot strategy for dealing with a disaster that has struck, is sufficient. Ancillary to all of this is a shared belief among these same large enterprise executives that the disasters that they hear about are “unlikely to ever happen to us.”
Understanding Your Key Supply Chain Risk Points
Supply chain risk management begins with an understanding of what a company’s most vulnerable risk areas are — and then deciding how that set of risks can be reduced. Risk management and contingency planning is also an exercise that should never be taken on in isolation by an IT executive, but rather by a cross-section of corporate executives throughout the business so that risk management and contingency planning for the supply chain is a shared responsibility that everyone engages in.
“There is actually a step-by-step process you can use for supply chain risk and contingency planning,” says Zamsky. “The first step is for a cross-disciplinary corporate management group to assess what the company’s risks are. Realistically, you can’t eliminate all of these risks, even if you plan for them — but you can certainly mitigate and reduce them. The second step is to prioritize these risks from the most to the least important on a list. The group should then go through this list, assigning a value to each item based on its likelihood of occurrence, and also on its likely impact.”
Based on this evaluation, a ranking gets assigned to each risk item on the list.
“Once you have the ranking, you can go through each item and develop the set of mitigation steps that the company should take if that risk occurs,” says Zamsky. This is a well-defined process that any management team can complete if it is committed to the concept of organization-wide risk and contingency planning and responsibility.
Developing a Set of Supply Chain Best Practices for Risk
Given the rising risks of global climate change and unpredictable weather events; the new demands of the global trade “playing field”; the continuing propagation of country-specific customs, trade and labor practices and regulations; and continuing political unrest — especially in emerging and high-potential economies — companies today can ill afford to continue what for many has been a hands-off approach to contingency planning and risk mitigation in the business. However, even if companies realize the necessity for business risk and contingency planning for their supply chains, a long history of neglect for such planning in the business does not make plan formation a “slam dunk” process. Lacking risk and contingency planning for the business side of the supply chain, many companies will find it necessary to seek outside help. Others will look to best practices that can assist them in their efforts.
Among the supply chain risk and contingency planning best practices companies will likely consider are the following:
#1: Developing a formal enterprise risk management program for the business side of the supply chain.
“This program would identify supply chain risks,” says Dick Jennings, senior vice president and general manager, supply chain solutions, Ryder Systems Inc., which provides end-to-end supply chain logistics management. “Crisis management plans are critical and must be reviewed, practiced and updated on a regular basis. Supply chain network design should also take into consideration risk mitigation strategies — so companies need to consider sourcing, distribution networks and transportation alternatives for their supply chains. Partnering with an outsourced provider that has infrastructure, engineering expertise, technology and significant purchasing power can also help mitigate supply chain risk.”
#2: Assessing your supplier base for vulnerabilities and risk exposure.
“Supplier management is an area that companies should be looking at and planning for when it comes to risk management and business continuation in their supply chains,” says Karrenbauer. “If you analyze your supplier base, you should be able to identify those suppliers that are providing raw materials for more than 50 percent of a product — or you should be able to spot a single supplier in an unstable part of the world where you have a sole source agreement in place. … Spreading contract awards across several suppliers, even if you have one that is decidedly primary, also provides flexibility of supplier choice that enables you to failover to another supplier that already knows your product if you need to do so.”
#3: Reviewing your logistics and distribution network for risk reduction opportunities.
“This includes considering regional or near-sourced distribution center networks, incorporating alternative energy solutions that will function in the event of a power loss (e.g., natural gas), investing in technology to help increase supply chain visibility to improve fast decision making, rethinking inventory positions, and working with a transportation management partner who has the scale to procure alternate transportation carriers and modes in the event of disruption,” says Jennings.
#4: Considering the services of a 4PL.
“A fourth party logistics provider is an orchestrator of the supply chain that provides strategic support, assembling best-in-class supply chain elements to facilitate a continuous flow of value, and operating only where it brings the most value to the customer,” says VanGervin. “4PLs focus on optimizing the upstream and downstream processes within the enterprise to create continuous flow of value and also provide robust project management and governance processes to ensure rapid change can occur to optimize the value delivered. In this way, service levels increase, costs go down and supply chain knowledge in the shipper’s organization increases.” For companies lacking risk and contingency planning experience for the supply chain, a 4PL can also step in and provide immediate value.
#5: Investigating supply chain financing to reduce risk.
“There are companies like ours that provide supply chain financing,” says Zamsky. “In one case, we had a large company client whose products were dependent on the efforts of its suppliers — so its ability to launch new products in the market windows it wanted to hit were subjected to delays when it became necessary to wait for inventory because of supplier delays. One way to combat this was to build up product inventories early and then wait for the product launch — but building up inventories before releasing product to market can be risky and costly. The company decided to use us for the inventory financing, and we also stored and ultimately shipped this inventory for the client. The strategy was value-added for the client because the temporary financing that we provided freed up cash flow.”
No one risk and contingency management plan fits all organizations, but recent history and future projections should be ringing the bell for all companies that must manage supply chains that now is the time for business-side risk and contingency planning that can complement the IT disaster recovery and business continuation plans that most already have in place.
“Over the past few years, we have certainly seen an increase in natural disaster-related disruptions, like Superstorm Sandy and the recent Polar Vortex,” comments Jennings. “However, because of the increasing global nature of supply chains, addressing supply chain risk is a much more complex exercise. To take advantage of lower labor costs, many companies have off-shored manufacturing and sourcing to Asia. However, the longer the supply chain, the greater the opportunity for risk. Risk, in this case, can come in the form of a spike in fuel prices or a change in consumer demand. New risks companies face include disruptions from political instability and even security-related risks like acts of terrorism. As a result, having a comprehensive supply chain security and risk reduction program has significantly increased in importance.”