Ripe with opportunity, global supply chain also brings substantial risk

While there can be cost efficiencies from outsourcing to global suppliers, manufacturers should carefully evaluate supply chain risks from manmade and natural disruptions.

The supply chain has always been mired in operational complexity, but the hydra-headed beast has grown even more ornery as long-standing issues of real-time visibility and inventory optimization are compounded by newer concerns about global transparency and supplier risk management.

On the positive side, supply chain management (SCM) is far better understood than it was 10 years ago, when it emerged as a collection of disconnected disciplines, such as demand planning and just-in-time inventory management. Yet despite development of a more holistic SCM and technical progress in addressing some of the outstanding challenges, manufacturers today are confronted with a discipline that is exponentially more complex—and far more strategic to their competitive edge and long-term profitability.

“The supply chain is more extensive, far more global and much more fragile than it ever was before,” said Joshua Greenbaum, principal of Enterprise Applications Consulting, a Berkeley, Calif.-based consulting company specializing in enterprise applications. “Look at what happens in the global supply chain when a disruption like major flooding in Thailand or an earthquake occurs. It disrupts a huge amount of real-time business models, and if you can’t get to market on time with product at the right price with the right configuration, you lose your profit window. That combination is tricky to manage and makes everything more complex.”

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Experts say too many companies and top executives still don’t treat their supply chains as strategic resources. According to a Gartner survey, about 18% of companies view the supply chain as strategic, while close to 40% see it as the cost of doing business and the remainder regards it as important, but just one source of competitive advantage. “To a lot of executives, supply chain is like household utilities -- the only time they’re concerned is when it doesn’t work,” noted C. Dwight Klappich, a research vice president at Gartner Inc., is based in Stamford, Conn.

The fallout from the 2011 earthquake and tsunami that devastated Japan and derailed the supply chains that are heavily dependent on Japanese suppliers has served as a much-needed wake-up call for manufacturing executives. The ripple effects of that disaster, followed by flooding in Thailand last November, caused major disruptions to the global supply chain, leaving manufacturers in the automotive and consumer electronics sectors, among others, grappling with component shortages, production delays and product backlogs. Companies scrambled to get their hands on parts and materials to support their just-in-time manufacturing and outsourcing strategies.

“The two big factors to be learned from last year are disruption and transparency,” noted William Newman, managing principal at Newport Consulting Group, based in Clarkston, Mich. “[Supply chain] is not just a regional thing any more. We are all connected, and if you didn’t pick that up last year with the devastation from the tsunami in terms of the effect on both human loss and material loss, then shame on you. The lesson for manufacturers is they have to figure out materials [back-up] plans and look for opportunities for suppliers to come on board in a second-tier role.”

Balancing supply chain risk, reward

Supply chain risk management isn’t solely about planning for continuity in the wake of a natural disaster. Today’s manufacturing executives must consider risks related to the financial and social behavior of their suppliers -- conditions that have traditionally been outside of their direct responsibility.

The recent hubbub over Apple and its primary manufacturing outsourcing partner, Taiwan-based Foxconn, illustrates how the scenario has shifted. While the well-oiled Apple-Foxconn relationship has no doubt fueled the consumer giant’s phenomenal success, recent reports of harsh worker conditions have created a backlash against Apple and raised serious questions of corporate social responsibility that have tarnished the heralded reputation of its supply chain operation.

“The biggest problem associated with suppliers today is environmental risk and financial risk associated with factory workers,” noted Ann Grackin, CEO of ChainLink Research, a consultancy specializing in supply chain management based in Newton, Mass. “These are issues senior executives have to deal with.”

Giving all these factors, both new and old, there are far more executives involved in supply chain management and planning, which is another wrinkle adding to the discipline’s growing complexity. “It used to be that you had five guys running supply chain -- now you have call center agents with supply chain information, people in purchasing, procurement and logistics,” Greenbaum said. “Today, there’s a long list of stakeholders as the strategic value of supply chain permeates and more people become involved.”

Luckily, software has evolved significantly to help manufacturers get a handle on the complexity and automate many of the processes. Emerging SCM technologies, particularly those in the area of predictive analytics, are also helping manufacturers become proactive about real-time decision making and more strategically minded about supply chain planning and optimization.

“Now we have greater knowledge of what’s available in the market and it’s almost like a crystal ball,” Newman said. “Being able to predetermine what is coming down the pike and managing the supply chain accordingly rather than [making decisions] based on historical models and gut is where we’re heading.”

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