Supply chain risk management in the spotlight
A few days ago, the world’s seventh largest container shipping company by volume, Hanjin Shipping, filed for bankruptcy protection. A lot of the products being shipped by Hanjin are headed to U.S. and European retailers (toys, electronics, clothing, furniture, etc) getting ready for the holiday season. However, many ports are not allowing these ships to dock due to the risk of creditors seizing the ships, and any such event will cause congestion in the ports. According to sources, Stevedores are demanding advance payment in cash. As Hanjin is fighting to prevent seizure by creditors, several ships remain marooned in the sea. A contact of mine with firsthand knowledge of the matter commented that it is a nightmare to claim containers from a bankrupt shipper. In short, it is a mess! Such risks are on the rise. Companies are spending more on outsourced products and services than in the past. There is a constant push to free up working capital by leaning down on the inventories. Lead times are in weeks and months in cases where manufacturing is outsourced to firms on the other side of the earth. Linear supply chains as we know them are turning into supply networks with more players and parties than ever before. To understand the geopolitical risks, all you need to do is to turn on network news. Given all this, one would think that supply chain risk management is more prominent now. However, a 2014 report by University of Tennessee on managing risk in global supply chains points out that 90% of the firms surveyed do not quantify risk when outsourcing production! With manufacturers, distributors, and retailers alike scrambling to get their inventories off of Hanjin ships, now is as good a time as any to take stock of where your organization stands with regards to supply chain risk management. Here are some key aspects of risk management:
- Identify: Supply Chain Risk Leadership Council (SCRLC), a consortium of several leading companies put out several best practice recommendations towards managing supply chain risks. One of these recommendations is to create a risk registry wherein you collaborate with your teams to identify all the risks to your supply chain with emphasis on your supply base. Apply Pareto principles so you can prioritize risks that will be truly disruptive to your supply chain.
- Quantify and mitigate: Let’s say one of your key suppliers is located in an earthquake prone region. What are the chances of the supplier being down due to such an occurrence? How long will it take for you to recover your supply through alternate sources or from the impacted supplier? What would be the revenue and cost impact during the recovery time? Assess the probability of each risk occurring and build them into your business justification as you make outsourcing decisions. Of course, this will be no guarantee that you will eliminate risk. However, by having well-documented contingency processes, it will likely help you recover faster than your competition when impacted by a disaster.
- Monitor: On a day-to-day basis, there are mini earthquakes and tsunamis happening, perhaps under the radar in your supply chain in terms of quality issues, missed vendor deliveries, customer order cancellations, etc. If not addressed appropriately, the cumulative effect of these day-to-day disruptions can match up to the damage by any major disaster. Monitoring such metrics is important, and a supply chain control tower can be a key component of that strategy. Technologies that can process real world events and provide visibility to risks in your supply chain can be interesting to look at. With the advent of big data and machine learning, these systems are starting to get smarter in terms of providing better contextual information.
- Respond: While risks can be mitigated, they cannot be eliminated. While major disasters such as earthquakes, tsunamis and such come to mind when we think of supply chain risks, Hanjin’s bankruptcy is a real and tangible example of a risk relating to business partnerships. You will need processes and systems that support speed of response and collaboration to address any number of supply chain disruptions. In case of Hanjin, for example, its customers can benefit by rapidly evaluating the impact of downstream orders and forecasts, and make contingency plans, provided they have such capabilities. One common mistake is to think of supply chain risks as the domain of supply chain execution and event management. However, when supply lead times are long, your Tier 1 and/or Tier 2 suppliers are executing today to support your plans 3 to 4 months out. In the event of Hanjin, the business impact will be felt a couple of months out as the holiday season picks up. Hence it is important to think of supply chain planning and execution in a holistic way with extended supply network visibility.
- Learn and improve: In the spirit of continuous improvement, it is important to understand how you and your peers respond to risks. Then, as appropriate, add these learnings to your risk recovery playbooks or contingency processes as mentioned in #2 above. As an example, if your organization is impacted by Hanjin situation, as you put together recovery actions in place, the learning should be captured as part of your playbook.
As disruptive as Hanjin’s bankruptcy could be, organizations that are better prepared to handle such disruptions will come out ahead. Conscious effort into supply chain risk management is the key for such preparedness!