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Reducing the Risk of Supply Chain Disruptions

Book Description

The early years of the 21st century have been notable for major supply chain disruptions that have highlighted vulnerabilities for individual companies and for entire industries. In addition to the loss of life, the Japanese tsunami in 2011 left the world auto industry reeling for several months. Thailand’s 2011 floods impacted the supply chains of computer manufacturers dependent on hard disks and Japanese auto companies with plants in Thailand. The authors note that companies want to protect their supply chains from serious and costly disruptions, but the most obvious solutions — increasing inventory, adding capacity at different locations and having multiple suppliers — undermine supply chain cost efficiency. Surveys have shown that while managers appreciate the impact of supply chain disruptions, they have done very little to prevent such incidents or mitigate their impacts. The authors argue that supply chain efficiency, which is directed at improving financial performance, is different from supply chain resilience, in which the goal is risk reduction. Although both require dealing with risks, recurrent risks (such as demand fluctuations) require companies to focus on efficiency in improving the way they match supply and demand, while disruptive risks require companies to build resilience despite additional cost. Recently, managers have become much better at managing global supply chains through improved planning and execution and building operational reserves such as production capacity and inventory. However, the authors argue that reliance on sole-source suppliers, common parts and centralized inventories has left companies vulnerable to disruptive risks. Although sourcing from or outsourcing to distant low-cost locations and eliminating excess capacity and redundant suppliers can make supply chains more cost-efficient, they also make supply chains more vulnerable. How should managers reduce their supply chain’s exposure to disruptive risks without giving up hard-earned gains in performance from improved supply chain efficiency? The authors suggest two strategies: (1) segmenting the supply chain or (2) regionalizing the supply chain. Whereas a supply chain focused on performance improvement may find itself without backup sources for critical parts or commodities, segmented or regionalized supply chains can design and deploy solutions fairly quickly in case of a disruption. The authors further suggest that companies design business continuity plans to help them respond to disruptive risk incidents and that they overestimate the probability of disruption.