Truth machine

Three Fallacies of Supply Chain Risk Mitigation


Supply chain science has certainly come a long way, but many organizations still have a narrow view of supply chain intricacy and how best to mitigate the risks.  This is particularly troubling when dealing with supply chains that manufacture complex goods, where the impact of disruptions can quickly extend beyond the bottom line to a company’s brand and even its survival.  Here are three common fallacies that we hear all too often.

Fallacy #1:  A supply chain is a supply chain

While most professionals inherently know this is wrong, many organizations still treat all supply chains the same.  There are fundamental differences between a supply chain of facilities storing and moving things versus a supply chain of manufacturers making things.  Within manufacturing, there are significant supply chain differences between product types, such as manufacturing electronics versus mechanical products.  Within mechanical products, there are significant differences between making a toaster and making an airplane.  Supply chains for complex manufactured goods are unique, requiring a special approach to risk management.

Fallacy #2:  Traditional supply chain risk-mitigation strategies suffice

Sure, many of the traditional approaches have value.  But how do you know when that snapshot of supplier readiness changes a week after it was completed?  Or what happens when safety stock becomes unavailable due to a natural disaster or transit strike?  Many of the traditional risk-mitigation strategies have a common weakness—you have limited insight and control.

Fallacy #3:  You can anticipate everything

Nope. Not a chance.  We are reminded of this over and over again by events like tsunamis, nuclear meltdowns, financial meltdowns, political unrest, terrorism and so many more.  Even with all of the sophisticated computer modeling at our disposal, it is still nearly impossible to anticipate every possibility, much less a combination of events.

So if manufacturing supply chain challenges are unique, standard mitigation approaches are insufficient and we can’t anticipate everything, what is the solution to this challenge?

Focus on what you can control.  Your best way to mitigate risk is to be deft and agile—ready to react to whatever punches are thrown your way.  Here are several steps to accomplish this for supply chains that manufacture complex goods.

1.    Know who is producing what

After last year’s devastating tsunami, it became clear to everyone that you really should know who is in your supply chain, from raw materials to your customer.  However, that alone is not enough.  You need to know specifically what each supplier is producing and what tools and processes they’re using.  You need to know who has the technical data for what they’re producing (drawings, models, bill of materials, specifications, etc.).  You also should know the manufacturing processes being used (machines, speeds, feeds, g-code, etc.) at each supplier.  Knowing this allows you to more readily move production to another manufacturer with similar capabilities when necessary.

 2.   Know which other manufacturers can make what your suppliers make

Even in this day of the internet, there is still a considerable amount of work and time involved to find the right manufacturer with the right capabilities and capacities at the right time.  If you wait until there is a disruption to begin identifying those manufacturers, you’re already losing ground.  A long sourcing cycle or production ramp-up will just add to your misery.  At the very least, you should identify alternate suppliers with different profiles (i.e., geography, financial stability, industry) so that you can move more quickly.  At the very best, you will have already initiated dialogue with these alternative suppliers and even put a contract framework in place.

 3.   Gain visibility to get an early warning

A typical best practice in manufacturing supply chains is to use tools like RFID to monitor products as they are shipped from one node in the supply chain to another.  Unfortunately, that is not enough.  Just as supervisors 40 years ago used to be able to look out over the factory floor and spot problems right away, you need to be able to see into each supplier’s manufacturing processes to watch for potential issues.  Maybe the queue on one of the lines is backing up.  Or processing each piece is taking longer.  Perhaps reject rates are increasing.  These and other early warning signs should be visible, providing you with an early warning before it’s too late to do anything about it.

Probably one of the best organizations at supply chain management for manufacturing complex goods is NASA.  While the agency relies on many of the same practices used by commercial organizations, its approach is considerably more robust.

For instance, NASA knows who all the suppliers are in all of its manufacturing supply chains and what each of them makes.  These manufacturers can be displayed on a Google-like map, indicating the location for each supplier, as well as the materials and processes for each.  The map can incorporate forecasts for hurricanes, wildfires, floods and other events, so users can see in advance which of their suppliers might be affected.

Rather than hoping that suppliers are prepared, immediate action can be taken.  Alternative suppliers with similar capabilities can be identified instantly.  Once probability and impact are assessed, goods that were in transit to an area likely to be impacted can be re-routed to alternative manufacturers before the disruption occurs.  (Go to Advanced Core Concepts for a demo of the commercial version of this program.)

Granted, some of the above recommendations may not be addressed easily, as there are technical and relationship hurdles to be cleared.  The good news is that there are a number of government and commercial initiatives starting to help knock down the technical hurdles.  As for the relationship issues, you can start to address those by re-thinking how your supply chain relationships are structured and contracted.

This deeper approach to managing risk for manufacturing supply chains obviously can yield bottom-line benefits.  As a simple example, if it currently takes one year to source and ramp-up a new supplier, a common approach may be to carry one year’s worth of safety stock.  What happens to the cost of safety stock if you can reduce sourcing and ramp-up to six months or even less?  These and other costs can often be wrung out of traditional risk-mitigation programs.

More importantly, you will have just created a supply chain with two key traits that many customers are looking for.  First, it is highly reliable regardless of what unexpected events may occur.  Second, the supply chain becomes very agile, able to adjust not only to disruptions, but also to changes in demand.  That’s a proposition that can help increase both sales and profits.