Forget the bird flu: Bad suppliers pose a much greater supply chain risk
Sidney Hill, Jr., executive editor -- Manufacturing Business Technology, 10/1/2007 6:00:00 AM
Hurricanes, earthquakes, viral epidemics, terrorist attacks: these are just some of the catastrophic events that can disrupt supply chain operations. But they aren't the biggest risks supply chains face.
The more mundane inaccurate demand forecasts, IT system crashes, or poor supplier performance can wreak just as much havoc on a supply chain as any natural or man-made disaster. What’s more, these nonspectacular events are everyday occurrences in many supply chains, making them much greater threats to the overall health of a business.
This fact was highlighted at a symposium on supply chain risk management hosted by LogicTools, a developer of supply chain optimization software. The event took place last week in Chicago.
David Simchi-Levi, cofounder of LogicTools, says supply chains confront new types of risks as businesses globalize.
With supply chains stretching around the world, says Simchi-Levi, lead times and supplier performance pose greater risk than ever. Strategies like Lean—which lower inventory levels—put global supply chains in greater danger of stock-outs. In fact, says Simchi-Levi, recent studies indicate many companies operating global supply chains are boosting safety-stock levels as a form of protection—a move that in many cases negates any cost savings that may have resulted from adopting the global model.
A better alternative, suggests Simchi-Levi, is building speed and flexibility into the supply chain. Ways of doing that include:
• Designing products in modular fashion, with components that can be sourced from a number of suppliers; and
• Establishing processes—and adopting tools—that enable early problem detection.
These strategies, along with the proper use of supply chain optimization software, can help manage everyday supply chain risks that by nature are easier to control.
“When we look at risks like natural disasters or geopolitical conflicts, there is not a lot of data we can use to determine when these things will happen, and how they will affect the supply chain,” says Simchi-Levi. “On the other hand, there is data available on the known risks [like supplier performance, forecasting accuracy, and supply chain execution problems].”
Most of that day-to-day operational data is available in a company’s existing systems. Simchi-Levi says loading the data into an optimization engine like those that LogicTools offers can yield models that indicate when a supply chain is headed for trouble.
Ultimately, says Simchi-Levi, companies that become good at managing the nonspectacular risks will be prepared to respond properly when a major catastrophe hits. He offered Helsinki-based cell phone maker Nokia as an example.
When a lightning strike destroyed all the inventory of a major chip supplier, Nokia had monitoring systems in place that quickly alerted management of late component deliveries. When Nokia inquired about the situation, the supplier refused to acknowledge a problem. Not convinced it was getting the true story, Nokia management immediately began ordering parts from alternative suppliers.
Two weeks later, the original supplier admitted it would not be able to deliver components for several months. But it was no longer a problem for Nokia because it had given itself the flexibility to find new suppliers, avoiding any supply chain disruptions.
A competitor that didn’t have the same processes in place soon exited the cell phone business.
