In recent years, managers have become more adept at managing supply chains and mitigating recurring risks in the supply chain through improved planning and execution. However, supply chains are still (and will always be) vulnerable to unforeseen events from disruptive forces such as pandemics, natural disasters and economic downturns.
While measures such as sourcing from remote, low-cost locations and eliminating excess capacity or redundant suppliers can lead to a more efficient and cost-effective supply system, such measures can also make a supplier more vulnerable to disruption, with potentially damaging financial consequences if it occurs.
The High Cost of Supply Chain Disruptions
As the frequency of supply chain disruptions continues to increase, businesses in many industries are experiencing significant impacts that negatively affect their bottom line. According to Forbes, in 2019 73% of businesses had experienced a supply chain disruption. Even more concerning, supply chain disruptions are expected to be more widespread and damaging in 2020, in part due to COVID-19.
How do supply chain disruptions impact businesses? In many ways, including:
- Increased operational costs
- Loss of productivity
- Decreased brand confidence
- Increased customer complaints
- Service outcome impairments
- Lost revenue
Unexpected events have cost businesses and entire industries billions from supply chain disruption in the last decade. The Tohoku earthquake and tsunami in Japan in 2011 is one example. It ultimately cost the country over $200 billion and severely impacted the global supply chain. Another example, the trade war between China and the U.S. in 2018, caused an estimated $10 billion loss in the electronics industry alone.
Causes of Supply Chain Disruption
Every year, manufacturing companies dedicate thousands of hours and significant resources to avoiding supply chain disruptions and maintaining productivity, reliability and delivery schedules for customers. They make this investment because a supply chain disruption can leave a company vulnerable to a variety of consequences, such as the loss of a customer, a supplier or even an employee.
Due to the interconnectedness of the global supply chain and the complexity of production processes, there are many forces beyond natural disasters and recessions that can result in interruptions of and breakdowns within supply chains.
Supply chain disruptors can include:
- Natural/environmental events
- Inaccurate business forecasting
- Changing government trends
- Machinery breakdown
- Human/operator error
- IT outages
- Abrupt changes in transportation costs
- Shipping damage
- Traffic delays
- Political unrest
- Failure to respond to technological trends
How to respond to and remedy these disruptions at the production, storage and transport levels depends on how vulnerable they are to such disruptions.
Managing Supply Chain Disruptions
Today's managers know that they must protect their supply chains from serious and costly disruptions. There are solutions that can help them reduce risk. However, they require a fair amount of effort and investment. A much more cost-effective approach is to implement proper supply chain management.
If your goal is supply chain resilience without costly risk mitigation, you need to reach agreements with multiple suppliers, increase inventory levels, add capacity at different locations and improve the cost efficiency of your supply chain.
Companies can also use process analysis as a powerful tool to make inventory and procurement decisions that increase the robustness of the supply network. In the same way that disruptive risks require companies to be prepared to absorb additional costs, this also means that managers must focus on better matching supply and demand. In other words, companies must maximize the effectiveness of their supply chains.
Even when production is centralized, supply chains must be flexible to avoid concentrating risks in a single plant or production line. In order to be protected from supply disruptions, companies should consider leveraging several production facilities that can produce smaller batches. This allows an organization to take immediate corrective action at the affected site in the event of a major supply chain disruption such as a power failure or fire even as production continues elsewhere.
For example, an automotive company may have multiple supply sources for common parts, which allows them to limit the on-hand supply of certain items in order to reduce the impact of a possible recall or parts shortage. Containment strategies generally aim to limit the risk of large-scale disruptions to the supply chain as a result of these kinds of events.
Based on the information from a supply chain analysis, managers can pursue a variety of strategies to shorten recovery time and reduce costs for their businesses. This includes the consideration of alternative sources such as competing companies or several companies affected by a supplier disruption. Contracts with replacement suppliers can be negotiated to give priority to some companies over others in the event of disruption to the main supplier, which can reduce the time to recover as well as reduce the financial impact.
Companies should strive to sharpen their risk-reduction tools with each disruption of the supply chain. They should also take steps to ensure that they work with partners who implement best practices for protecting supply chains and dealing with common disruptions. These steps can help a business predict and prepare for natural disasters and develop backup strategies to address supply chain delays and outages.
COVID-19 Supply Chain Disruption
In 2020, many companies did not have risk management processes in place to deal with a disruption like the coronavirus pandemic. For those that depended on China for products or raw materials, the supply chain disruptions were devastating.
One notable outcome of COVID-19 on the global supply chain is that it has highlighted the vulnerability of these relationships. Some believe that COVID-19 will be the event that causes entire industries to rethink their supply chain model.
Looking ahead companies can take the following actions to safeguard themselves against events like the coronavirus pandemic:
- Engage with the extended supply network
- Improve inbound material visibility
- Enhance production scheduling agility
- Better understand industry-specific demand impact
- Implement plans for addressing different global scenarios
- Maintain open lines of communications with important customers
- Improve workforce planning
- Update inventory management procedures
- Consider alternative outbound logistics options
- Better understand alternative sources of supply
Supply Chain Management Partnership Opportunities
Addressing supply chain disruptions requires a high level of commitment to ensuring supply chain resilience in the face of any kind of disaster. In addition, warehouse continuity plans help prepare your assets and operations for ongoing accessibility and functionality in the event of a disaster.
Let NewStream Enterprises, LLC play a key role in your supply chain management and contingency planning so that you can not only survive the next crisis, but also thrive both before and after.