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A new survey from Deloitte paints an alarming picture of a corporate world that’s unprepared to deal with supply chain risk. In Executives Face Growing Threats to Their Supply Chains, the global audit, financial advisory, tax, and consulting firm reveals that global executives are increasingly concerned about the growing risks to their supply chains and costly negative effects such as margin erosion and the inability to keep up with demand.
But even as they operate in this environment of escalating risk, 45 percent of surveyed executives say their supply chain risk management programs are only somewhat effective or not effective at all. Fifty-three percent admit that supply chain disruptions have become more costly over the last three years, and 48 percent say such events had become more frequent during that period.
Steve Vecchiarelli, Hotenda’s vice president, supply chain solutions, says companies’ lack of good supply chain contingency planning can often be traced back to weak communication lines between sustainability executives and supply chain managers.
“They don’t always speak the same language,” says Vecchiarelli, who points out that supply chains impact all operational areas of the typical firm—from marketing to sales to fulfillment.
Hotenda’s Steve Vecchiarelli says companies’ lack of good supply chain contingency planning can often be traced back to weak communication lines between sustainability executives and supply chain managers.“The key is for sustainability managers or executives to really understand the goals of the supply chain organization,” says Vecchiarelli, “and then align those goals with their own aspirations, rather than trying to force the supply chain organization into a sustainability framework. It is much more effective to take your sustainability goals and targets and apply them to the supply chain.”
Chasing Efficiencies and Lower Costs
Gary Lynch, global leader of Marsh Risk Consultancy’s Supply Chain Risk and Resiliency Solutions Practice in New York, says many companies competing in the global marketplace over the last few years have been driven by efficiency, low cost, and speed to market. As a result, supply chain strategies like outsourcing, consolidation of physical assets and suppliers, just-in-time manufacturing, and production shifts to low-cost countries have gained in popularity.
According to the recent Marsh report Supply Chain Resiliency: How Prepared is Your Organization?, these strategies can deliver important benefits like lower operating costs; higher margins; more flexibility, with the ability to launch better products more quickly; and the potential to grab market share away from competitors. But they also add complexity and sophistication to supply chains— expanding their geographic reach, creating dependencies and interdependencies (often hidden), eliminating redundancies, and forcing organizations to rely on more tiers of suppliers.
All of this translates into a lack of resilience and an increased risk profile and more vulnerability to natural catastrophes and other events.
“A fast-moving vehicle—or, in this case, supply chain—introduces more risk and is more complex,” says Lynch. “Combine that with reliance on outsiders to support the supply chain and you wind up with a much greater need to manage the associated risk.”
Pinpointing the Culprits
Jeff Karrenbauer, president of supply chain planning solution firm INSIGHT, Inc., in Manassas, Va., says supply chain disruptions can come from a variety of sources, including political unrest, climate change, sudden shifts in demand, and misguided technology investments. By using supply chain modeling strategies—the building of network models that start at the raw material point and end with the customer—that factor in multiple “what if?” scenarios, electronics buyers can better position their companies to overcome such challenges.
INSIGHT, Inc.’s Jeff Karrenbauer says supply chain disruptions can come from a variety of sources, including political unrest, climate change, sudden shifts in demand, and misguided technology investments.Based on the frequency and magnitude of the supply chain-disrupting events that have occurred over the last few years, Lynch says electronics buyers should avoid “chasing threats” and solving problems related to specific events. A better approach is to take a step back and determine which product streams are most critical to your company’s success.
Once those targets have been pinpointed, Karrenbauer suggests doing a supply chain audit. Look at five key measures: the raw materials used to manufacture your top products and where those raw materials come from; how much of those raw materials are used annually; the sales volume of the finished products; and the profitability of those products.
Look closely at all locations and transportation links across the network, Karrenbauer adds, and assess all costs and capacities associated with both raw material manufacturers and suppliers. Also consider the inbound links to manufacturing locations (whether they are company-owned or not) and finished goods locations (both domestic and international), both of which play important roles in avoiding supply chain risk.
If during this exercise you realize that a single supplier based in a politically unstable country is supplying 40 percent of your electronics components for a critical product, then it’s time to assess that relationship, diversify with other suppliers, and/or find other sources to rely on.
“The cheapest supplier is always good until you can’t rely on them anymore,” says Karrenbauer. “Don’t wait for that to happen.”
Procrastination isn’t an option when it comes to supply chain risk, says Karrenbauer, who has seen many companies put the exercise on the backburner until it was too late to do anything about it.
“Risk mitigation is one of the preventative steps you take, followed by planning on how you will minimize the damage if the inevitable should occur,” says Karrenbauer. “It requires commitment, time, and money, but the end result is definitely worth it.”