The heavy snowfall and freezing fog that closed airports and generally disrupted air travel in Europe the week before and during Christmas have me thinking about Donald Rumsfield and supply chain risk management. Why Donald Rumsfield? While speaking about the government of Iraq and weapons of mass destruction in a 2002 press conference, Rumsfeld, who was U.S. Secretary of Defense at the time, noted that there are known knowns, known unknowns and unknown unknowns. In other words, there are things we know that we know, things we know that we don’t know, and there are things we do not know that we do not know. It’s these so-called “known knowns,” “known unknowns” and “unknown unknowns” that are at the heart of risk assessment mitigation. The first step in risk assessment and mitigation is to visualize and analyze the known knowns. Think of the supply base for example—including your own internal manufacturing as well as suppliers. The supply management team must identify poor-performing, higher-risk and redundant suppliers, then transition away from them. When evaluating suppliers don’t forget that suppliers also have companies that supply them. Your assessment should consider high risk components throughout the entire supply chain. Companies with many suppliers may want to do an assessment based on the value contribution of the components used (those components used in the highest revenue producing end items would be have their supply chain evaluated first). The second step is to identify and assess potential risks to determine which ones have a probable chance of occurring based on the nature of the product and supply line. I’ll call these risks the known unknowns. So, for instance, supply managers realize that events such as the power outage that effected Toshiba’s production of NAND flash memory chips or inclement winter weather that wreaks havoc on supply chain operations can—and very well, may—come to pass. By proactively identifying, assessing and studying those events and potential resolutions, it’s possible to mitigate those risks using strategies such as developing plans to source from different suppliers, developing supply sources in other locations or using alternate modes of transportation. At other times, however, an unanticipated event takes place that wasn’t planned for, so there isn’t a mitigation strategy. Alternatively, an anticipated event may occur, and while there is a mitigation strategy for the event, there are unanticipated complications such as material shortages or quality issues. I’ll call those the unknown unknowns. In these cases, your ability to respond makes the difference between a minor blip or a full blown disaster. There are several elements that are required for fast response;
- You must receive a timely alert that indicates not only that the event has taken place, but more importantly that the event will have an impact on your business. Consider two events occurring; a lost supply shipment of a commodity component for a low value, low volume item, and a shipment of a unique component for a high value, high volume end item that is delayed due to weather. The first event may have no revenue impact at all. The second event could significantly impact revenues for the quarter. Without this differentiation, you might be spending your time dealing with the lost shipment when the late shipment will actually impact your bottom line.
- You must have the ability to model the event. Your simulation must be backed by analytics that allow you to accurately model the event and the possible resolutions in real time. While simulating the event and the resolutions, you must also be able to collaborate with other people and other teams to ensure that the resolutions take all factors into consideration and will have the best chance of succeeding.
- Finally, You must be able to compare the different possible resolution options to determine which resolution will best resolve the situation.
All of this must be accomplished in hours, not in days or weeks. Risk assessment and mitigation clearly are important and should be part of a complete supply chain risk management strategy. However, the ability to respond quickly and effectively when the unexpected happens is also critical. Without both capabilities, your supply chain risk management strategy will be incomplete.