Recurrent vs. Disruptive Supply Chain Risks
Nick Ostdick - February 16, 2016
It’s easy for supply chain planners and managers to get swept up in the daily operations of keeping products moving, monitoring inventory, and tracking shipments to ensure on-time delivery in the proper quantity. And while these tasks are all essential in the functionality and performance of a profitable supply network, planners and managers also need to focus on the risk of supply chain breakdowns, be it recurrent or disruptive, and the potential consequences of not being prepared to handle them.
A study conducted this past summer by the University of Tennessee indicated that only about 50 percent of companies have a backup plan in place should a major supply disruption occur, with roughly 47 percent admitting they have no contingency plans as part of their supply chain logistics practice.
While perhaps not evident in the day-to-day operations, the implications of administering a supply stream without a comprehensive strategy to address potential breakdowns can be disastrous both from a cost-effectiveness and customer service standpoint. In today’s supply chain landscape when the margin for error is already razor thin, supply chain planners and managers must devote some time and resources to understanding supply chain risks and creating a well-informed safety net to ensure fluidity of products.
Recurrent vs. Disruptive Risks
Before we can conceive of risk-adverse strategies, we must first understand the two main types of risks supply chain planners and managers are facing when it comes to global supply and demand. It’s also important to understand both categories of risks share a number of overlapping concerns, which while adding complexity to the issue can also work in a planner or manager’s favor – a well-informed plan to combat one risk may in fact leverage advantages in curtailing the other.
First, we have recurrent supply chain risks. While not to be understated, recurrent risks are often smaller in scale and cause temporary breakdowns in supply chain streams. Because of this, recurrent risks are often linked more to supply chain efficiency where a planner or manager’s primary task is ensuring volumes of product are easily available to supplement orders in the event of breakdowns or bottlenecks.
Recurrent risks often come in the form of:
- Inadequate reporting on inventory and capacity.
- Demand fluctuations based on partner or customer needs.
- Events such as seasonal weather
The second and more severe category of breakdown is called disruptive supply chain risks. Often referred to as ‘Act of God’ occurrences, these risks present in the form of large scale disruptions that can impact a supplier’s global footprint and result in a hemorrhaging of costs, resources, and productivity. In addition, because of the large scale and connectivity of so many supply chain processes, disruptive risks can have a domino effect that impacts many points of the supply stream, including original equipment manufacturers, distribution centers, freight partners, and sales staff.
Disruptive risks most often present in:
- Large-scale natural disasters or weather events, such as earthquakes and floods.
- Resource availability, like Port or labor strikes, damage to facility, and major equipment failures.
- Regional political, ethnic, or religious conflicts, protests, and unrest.
Another important distinction to draw between both types of risks is the basis for which planners and managers must base their solutions. With recurrent supply risks, strategies should be conceived from a cost-effective standpoint – implementing fiscally educated decisions as most of these risks are short-term issues. On the other hand, disruptive risks should be viewed through a lens of resiliency or agility strategies given these breakdowns could be long-term and require a multi-faceted approach.
As we just discussed, solutions for each category of risk do have overlapping components, and while strategies for troubleshooting these issues are not a one-size-fits-all hat, industrious planners and managers can find ways to adapt and implement recurrent risk solutions to ease the supply stresses of disruptive risks.
Recurrent risks, given how often they’re more localized in nature, can be safeguarded against by:
- Implementing intelligent planning software capable of running simulations and generating detailed forecasting.
- Analyzing specific elements within gathered Big Data to verify the past and current trends and similarities over defined periods.
- Implementing software that provides turbo-transparency across the entire supply chain such as production plans, inventory, shipment information, and parts availability in real-time, and to share these analytics with supply partners including those in transportation, distribution, and sales.
- Using the results of detailed analysis to estimate and adjust supply, routes, or capacity at key locations, during say known months of inclement weather, to have supplemental product on-hand in case of drastic fluctuations.
With disruptive risks, planners and managers can combat potential supply network breakdowns by:
- Utilizing intelligent planning tools to gain transparency and insight on how the current parts coverage will be able to match the production requirements. This transparency not only allows for day to day efficiency, but creates an agile environment where planners can get accurate time critical orders to their suppliers to mitigate production delays and the need for expensive expedited freight.
- Strategically locating suppliers or part facilities within different areas across the supply chain network and having visibility across such variable networks and alternative options can help to ease supply constrictions should one location experience a severe weather, climate, political, or other disruption.
- Localizing suppliers, hubs, and distribution centers as much as possible to promote visibility and transparency. Simply put, even with an integrated, intelligent planning system, it’s much easier to keep tabs on inventory and supply logistics when partner networks are housed in your backyard rather than halfway across the world. While not necessarily viable for all companies, this strategy also promotes better communication, coordination, and collaboration across all points of the supply stream.
Recurrent vs. disruptive. Cost-efficiency vs. resiliency. Local vs. global. In the end, regardless for which risk a planner or manager is preparing, the foresight and informed decision-making necessary to troubleshoot supply chain risk is integral in maintaining a streamlined, profitable stream of product supply.
At the end of the day, planners and managers must walk a thin line to ensure that production needs are covered without carrying excess inventory. As production continues to grow globally the need for a disruption plan, strategic sourcing, and intelligent planning tools will continue to rise in order to create security and certainty in the supply chain.