Category: Blog
Supply chain-related risks
Consider an Albuquerque-based Philips microchip plant, where a fire in 2000 disrupted production and supplies to Ericsson, costing them approximately $400 million in sales and forcing them out of the mobile phone market. Would Ericsson have taken such a risk if the supply chain had been fully analysed and understood?
Few people can have missed the news about Japan's earthquake and tsunami damage - including the awful news about the Fukushima nuclear power stations. But I wonder how many have thought through or seen the consequences for supply chains?
In June 2011, NZ sales of the Toyota Corolla slipped because of earthquake and tsunami damage in assembly plants in Japan. I wonder if a risk assessment of the supply chain from either end (production in Japan and sales in NZ) was carried out and, if so, did it show how easily supplies could be disrupted?
In my last blog I wrote about risk and risk management in a semi-theoretical way. Now put those thoughts in the context of supply chains, using the Japanese earthquake as one example of a distant, disruptive event.
Risk is "the effect of uncertainty on objectives". Supply chains with high uncertainty about production, transport and delivery of goods may be unacceptably risky - they leave us too uncertain our business objectives will be achieved. For many organisations, supply chains have become networks, so aggravating supply chain-related risks.
Before asking how such uncertainty can be managed, we need to understand the external context of the supply chain. Questions about the point of origin of the various raw materials and inputs into the chain may reveal a lack of knowledge about who makes critical components and how vulnerable they are. Changes in the external business environment can also create emerging risks to the supply chain. Such changes need to be identified and understood before they become risks.
What of the internal business environment? What are the organisation's business objectives? How will those be affected by a supply chain disruption? What capabilities does the organisation have locally and along the supply chain?
Once the business environment is understood, supply chain-related risks may be easier to identify and analyse. Even a simple qualitative SWIFT (Structured What If Technique) analysis supported by a flowchart illustrating the overall supply chain may show vulnerabilities and threats - despite current controls. When evaluated, some risks will be found unacceptable and need treatment.
How can you manage supply chain-related risks? An effective risk analysis will suggest some treatment options; they might include:
- diversification of suppliers (and their suppliers)
- choosing suppliers in areas that are politically, economically and geographically more stable
- choosing transport routes less vulnerable to weather-related events
- holding more than just-in-time stock levels to accommodate short-term disruptions.
What could we learn from this? Several things seem quite important.
For a New Zealand organisation on the receiving end of a supply chain, how much uncertainty is there about the connections along the chain? What premium might be attached to reduction of that uncertainty? Does the uncertainty present any opportunities?
And for a New Zealand exporter, supply chain reliability may now join quality and price as a key determinant of sales.
Put another way, if you want to sell tulips to Amsterdam or coals to Newcastle you need to be sure the goods will arrive on time and in a saleable condition.