Supply Chain Is A Risky Affair

“Fire at Lite-On plant affects more than 50% of LCD monitor production capacity” (source: emsnow, Feb 06 , 2008)

“In 2002, the International Longshore and Warehouse Union was locked out, shutting down ports along the West Coast of the United States for 10 days. The lockout was estimated to cost the US economy up to 2 billion dollars per day. The lockout closed several factories including a joint venture between GM and Toyota.” (source: cnnmoney, Oct 3, 2002)

“Nike Rebounds: How (and Why) Nike Recovered from Its Supply Chain Disaster” (source: CIO, Jun 15, 2004)

I was doing a little research on Supply Chain disasters and came across many examples that were eye opener. SupplyChainDigest has published a list of top Supply Chain disasters that resulted in businesses going bankrupt or CEOs having resigned or sunk investments.

And a recent example of milk adulterated with melamine that killed or seriously sickened babies in China.

I wonder how many of the supply chain leaders take into account such risks in their decisions and have mitigation plans. When it comes to sourcing cheaper and thereby getting a perceived savings in cost, we turn a blind eye to such risks. However there are few exceptions like HP’s Procurement Risk Management Program that works out possible scenarios and shares both risks and rewards with their suppliers.

Let us analyze the factors that have resulted in greater need for focusing on supply chain risk management:

Global Sourcing : Lot of sourcing has shifted to low cost producing countries. Other than challenges of increased lead times, lack of visibility & communication problems, the risks of supply failure, quality & environment related issues have increased manifold. There have been cases of high toxic contents in the plastics used for children toys and recycled leaking batteries. Such incidences have the potential to spoil the reputation of company for ever.

Demand volatility : With current recessionary trends, estimating demand reasonably well has become virtually impossible. The risk of producing excess stocks that may have to be either discounted or written-off. On the other hand potential of losing sales to competition if a pessimistic view of demand is taken.


Cash Flow : Despite all governments announcing revival packages & pumping liquidity in the market, the credit crunch continues. To achieve sales targets, some companies may extend credit to their customers. As a result cash flow and therefore business sustainability is severely impacted.

Single sourcing : We all grew up in Supply Chain learning the advantages of single sourcing and supplier collaboration. The current situation calls for a review of the single sourcing strategy. I am not advocating to start developing second source for every item, but have a review of the assumptions for single sourcing.

Currency Risk : Indian rupee has depreciated by 25% in last one year. RMB has been artificially kept low against USD despite balance of trade in favor of China. There will be a day when China sourcing will not be as lucrative as it is today.

Geopolitical Risks : The governments are under tremendous pressure from local population to put trade barriers to encourage domestic business. Obama has come out against outsourcing of services to low cost countries. Many countries are putting safeguard duties on imports to protect domestic industries against global competition.

Supplier Sustainability : The entire supply chain is not under control of a single entity. You have suppliers as well as suppliers’ suppliers. They are all part of your value chain. What if any of these suppliers follow illegal practices, pollute environment unlawfully? It can be a big risk not only due to disruption of supplies but also the dent in the reputation of the companies associated with such suppliers.

Well, there are other risks as well e.g. unrest, terrorism and natural disasters, which is beyond anyone’s control.

Every Supply Chain Manager should start analyzing and prioritizing risks to their business, as part of Supply Chain Strategy and make a plan for risk mitigation. The risk management involves three key steps:

Assessment : Identify key vulnerabilities in supply chain and the potential risk alternatives. Quantify the potential economic impact of current supply chain risk profile.

Analysis: Through analysis, make a business case that identifies, quantifies, and prioritizes critical supply chain risks and potential alternatives.

Roadmap: Develop detailed plans needed to implement the changes required to achieve organization’s future state risk profile. Institutionalize risk-mitigation into the supply chain planning and execution and measure process effectiveness and results.

AMR’s supply risk management guru Mark Hillman said, “The greatest risks are the day to day operational risks that can detract from shareholder value and performance. You need to focus on high probability risks that you can control, such as supplier failure or market risks, and take steps to mitigate these.”