April 18, 2012  
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Supply Chain Risk Lessons from Post-tsunami Japan
by Kelly Marchese, Siva Paramasivam and Michael Held

Despite the widespread impact of Japan's tsunami on global supply chains, most companies are not fundamentally changing how they manage supply chain risk. Meanwhile, supply chain risks appear to be rising, driven by a variety of internal and external forces. High impact, low probability "black swan" events now seem to be almost a regular occurrence. This is happening more often because in a globally interconnected business environment, problems that used to remain isolated now have far-reaching effects.

In today's hyper-connected supply chain environment, risks are evolving at a dizzying pace and can strike from almost any direction. There is a need for a more holistic view of supply chain risk, which should include four distinct risk categories:

  • Macro environment risks are broad external forces that affect the entire business and supply chain. For example, globalization can give businesses access to less expensive labor and materials, and opens up vast new markets. It also increases supply chain complexity, increases the probability and magnifies the impact of disruptions that in the past might have remained locally isolated.
  • Extended value chain risks center around a company's upstream and downstream supply chain partners. Increased use of outsourcing, for example, may have improved efficiency and has allowed businesses to focus more attention on their core competencies. But it has also made their operations more complex and exposed them to increased third-party risk.
  • Operational risks are tied to a company's internal manufacturing and distribution operations. Lean manufacturing, just-in-time inventory, and capacity rationalization may have boosted supply chain efficiency and may have made businesses more agile and responsive. But by reducing slack in the network, they have also reduced the margin for error and amplified the potential for disruptive problems.
  • Functional risks relate to the business functions that support supply chain activities, such as finance, HR, legal, and IT. Many of today's supply chains are enabled and accelerated by a broad suite of applications and systems. A disruption or breach in these critical systems can have an immediate impact on the customer experience.

Given the scale and scope of today's global supply chains, there is no way for a company to predict and prepare for every possible risk. However, what a company can do is build resilience. A business with a resilient supply chain can sidestep a wide range of risks and be able to bounce back quickly from risks that cannot be avoided.

Resilience is a characteristic many enterprises and supply chains have long aspired to. To make it happen, organizations should understand the essential components that are required to build resilience. These four capabilities are key:

  • Visibility -- being able to track and monitor supply chain events and patterns as they happen or before they happen.
  • Flexibility -- being able to promptly adapt to problems without significantly increasing operational costs.
  • Collaboration - being able to work effectively with supply chain partners in order to avoid disruptions and achieve common goals.
  • Control -- having clearly defined policies, monitoring, and control mechanisms to help ensure that proper procedures and processes are actually followed.

In a world where local problems in one region can bring an entire global supply chain to its knees, a business-as-usual approach to supply chain risk is just asking for trouble.

Companies that were fortunate enough to not be deeply affected by last year's disaster cannot afford to sit idle. They should use the experiences of others as a catalyst for building resilience into their own supply chains. Those that don't could end up learning things the hard way when the next disaster strikes.

Kelly Marchese is a Principal, Siva Paramasivam is a Senior Manager and Michael Held is a Specialist Leader, all in the Supply Chain and Manufacturing Operations practice in Deloitte Consulting LLP. An expanded version of this article originally appeared in IndustryWeek magazine.


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