Creating a Resilient Supply Chain
Posted on March 03, 2014 in Distribution
Most people understand the vital role that effective risk management has in keeping a business running. However, some of those same people with decision-making authority take the same approach in securing their supply chain. In essence, supply chains also need contingency plans because these systems are equally vulnerable to natural disasters.
One tornado, one terrorist attack or disease outbreak can destroy factories and warehouses. Businesses risk losing customer loyalty and market share without the ability to adapt quickly. While decision-makers cannot control every headwind that comes against their business, they can implement strategies to make the supply chain more resilient even after a setback.
Problems with supply chains can cost businesses in more than one way. Failure to demonstrate resilience can provoke an increase in insurance premiums. Generally, businesses are hit with penalties from insurance providers simply because they did not properly identify certain risks. Besides paying more for needed insurance, businesses must also replace supplies that were lost to the disruption.
Key Themes to Building Supply Chain Resilience
Central to supply chain resilience is the notion that a business does more than manage risk. The assumption – and by all accounts expectation – is that having this ability positions the business above competitors. As a result, the business gains an advantage even from high-impact/low-probability events.
Research shows there are three essential themes that can help build resilience within a company supply chain. The first – increase redundancy – has limited utility for most businesses. The other two – flexibility and culture – can have lasting effects.
In theory, a resilient business is built by creating supply chain redundancies. It makes sense to hold extra inventory and have backup suppliers while maintaining low-capacity utilization. When a disruption strikes, there is minimum delay in replenishing essential supplies. However, the breathing room that redundancy provides to continue operations can be a very expensive proposition for most businesses.</p<p>Additional stock, capacity and workers leads to significant cost increases. Some operations become sloppy with reduced quality production, which leads to more costs in correcting errors. A business needs to find middle ground if it chooses to increase redundancies in operations. Being heavily focused on redundancy could inhibit the business's ability to maintain efficiency.
Building supply chain flexibility gives a business the ability to respond better to demand fluctuations. Withstanding significant disruptions become a little easier to manage. To achieve flexibility, a business should consider the following:
- Adopt Standardized Processes – When the business has more than one plant, it should master the ability to move production from one plant to another. Interchangeable parts and generic parts can be used for many products. Similar or identical processes and designs within the plant encourage uniform practices. Employees can be cross-trained. All of these components allow the business to respond soon after a disruption. Resources can be allocated to the most needed areas.
- Use Concurrent Processes – Concurrent process are better than sequential processes in most supply chain settings. Key areas such as product development and distribution can continue after a disruption. To illustrate, a technology company could centralize its supply chain to span various functions within the organization. Engineering and sales, for instance, are aligned with the supply chain to give decision-makers a clear view of each operational area. This gives them the ability to quickly assess statuses when an emergency arises.
- Design for Maximum Postponement – Supply chain operations should have a built-in design to postpone production processes as much as possible. Doing this keeps products in a semi-finished mode for flexibility in moving products from surplus to deficit as needed. Generic manufacturing processes allow adaptation for extreme demand variability. Fill rates increase and customer service improves without adding inventory carrying costs.
- Align Procurement with Suppliers – Supplier relationships are crucial to maintaining resilience after a disruption to production. Not only should the business have a list of go-to suppliers, but it must also maintain strong relationships with each. Strong ties position the business to monitor each supplier and rely on them when unforeseen circumstances occur.
Failing to maintain close alignments with a supplier network can threaten the business's ability to remain resilient and responsive. Shallow relationships equals very little knowledge about trading partners. This could leave the business in the dark if there are problems with supplies. If a failure occurs, maintaining a close relationship would spread risks after a disruption. The best approach for building these supplier relationships largely depends on the procurement strategy of the business.
Change Corporate Culture
A distinguishing factor between businesses that recover quickly after a disruption and those that falter is the corporate culture. Businesses within different industries and catering to different customers share cultural traits that prove only the strong survives. Whether it is an automobile manufacturer, electronics retailer or passenger airline, a positive corporate culture can build the business up during challenging times. Businesses with a resilient supply chain will:
- Continuously Communicate with Employees – The business makes sure all employees are aware of strategic goals and tactical factors that dictate the daily pulse of the business. Employees should have continuous access to essential product manufacturing and shipment details, and a host of other important company information. Therefore, employees are fully aware of the business' status if a disruption occurs. Everything, from what the business is selling to where raw materials are located, is known so that better decisions are made during unknown circumstances.
- Embrace Distributed Power – Employees should feel empowered to take necessary action. This does not mean employees can usurp authority in any situation. Rather, managers should show confidence that line workers – who are often the first to be aware of a potential problem – will take necessary measures to contain a fallout from a disruption. Assembly line workers should not call the foreman to push a special alarm button in an emergency. Nor should naval carrier crews get permission from the commanding officer to stop flight operations if they detect a problem. A quick response is usually the best response.
- Engender Passion – Successful businesses know that engendering passion in their employees is crucial to staying resilient. Typically, employees that have a sense of the greater good beyond their everyday tasks will not only support the mission, but they will also believe in the mission. A bricklayer on a construction site who is passionate about his work knows he is not just laying bricks. He is building a house.
- Condition Employees for Disruptions – Conditioning employees for disruptions is the optimal way of maintaining resiliency within the business. This begins with frequent operational interruptions staged to give employees a chance to practice reactions. When faced with a real-life disruption, employees are conditioned to be innovative and flexible because practicing has made such scenarios “normal” to their survival mode. Supply chains are tested daily even without planned practices. Traffic congestion, road closures and adverse weather can test the recovery processes of the business on any given day.
What a Resilient Supply Chain Looks Like
In the corporate environment, resilience is the ability of a business to pull through after a major disruption threatens its operations. This includes the speed in which the business can return to normal production and performance levels. Fortunately, there are distinctive steps that a business can take advantage of to create a resilient supply chain. Many of these have already been discussed.
Others will vary based on the industry and risk profile of a specific business. The more complex the supply chain, the more difficult it could be to make necessary preparations. However, complexity does not equal impossibility.
First and foremost, a business should take time to understand how delays in any function of the supply chain will impact operations. It is in their best interest to identify threats to regular business operations and those that crucial partners could face. Otherwise, any business can expect longer recovery times and lost production.
Some businesses may find that using a load-to-deliver carrier offers a better way to simplify distribution. Utilizing their services after a disruption from beginning to end may help to eliminate transfers to third parties. Another positive impact in addition to reduced delivery times is seeing an increased awareness in product shipping strategy.
Knowing where products are located at any given moment allows businesses to have an effective reaction when conditions change. Faster recovery can occur when logistics networks have room for flexibility. Rerouting shipments can minimize issues that suppliers might face, which ultimately affect business operations. If businesses are unable to secure raw materials for production, the delivery of finished products is highly unlikely.
Another commonly overlooked partnership in managing risk within distribution networks is heavy-haul trucking companies. In some situations, the supply chain is served best with a dedicated fleet available when needed to balance inventory. The resilience of the supply chain network benefits greatly because these trucks are assigned to the movement of goods for a specific business.
Enhanced Competitiveness with Resiliency
There are substantial rewards for the business that builds a resilient supply chain. Not only is the hardened company able to withstand disruptions, but it also enhances its competitiveness. Some disruptions can create shortages in the supply chain that are similar demand spikes that occur with supply/demand imbalances. Resiliency allows the business to react to changes in market demand before competitors get an advantage.
The notion of supply chain resilience is not a new phenomenon in business. One of the core elements of running a successful business has always been its ability to confront and recover from unforeseen circumstances. External and internal threats from many different directions can undermine a supply chain.
Because of this, leaders within a business must keep a diligent watch on how to make their enterprise more resilient before the threat materializes. No secret formula exists to overcome all risks to a supply chain. However, the business that does better than others will do so because it has a resilient supply chain.