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Three misconceptions about supply chain disruption risks

Any supply chain, big or small, simple or complex, can be disrupted; planning for those disruptions and the associated risks can require getting past some wrong assumptions.

Disruption is a fact of life in the supply chain. No matter how large or small the chain is, no matter how simple or complex, breakdowns happen. Planning for disruption is a painful necessity, and adapting those plans as operations expand and improve is essential to keeping remediation effective.

Disruptions vary in size and complexity as much as supply chains themselves do. Labor shortages, natural disasters, up-chain stockouts, mechanical failures, strikes and fuel shortages are just a handful of the many causes. Moreover, disruption can occur throughout the supply chain with any partner, making planning all the more complicated.

Supply chain disruption is on the rise as supply chains grow more global and complex. According to a 2013 Pennsylvania State University study, disruption losses rose from $62 billion in 2009 to over $350 billion in less than three years.

One of the biggest issues with disruption planning, however, isn't inherent: It's how supply chain partners tend to think about disruption. Often, misconceptions about the nature of disruptions creep into the planning process, causing the resulting disruption mitigation to be incomplete or ineffective. Here are some examples.

"Supply chain disruption risk just happens; we don't bring it on ourselves."

The risks associated with disruption are generally assessed after a supply chain has been implemented. Too often, disruption planning is reactive, rather than proactive.

The distinction between supply chain disruption prevention and disruption protection is underappreciated and too seldom acted upon.

But the fact is that some supply chains run a greater risk of some kinds of disruption based on how the chain is set up. Inventory strategy provides a good example of this: Is the strategy optimized to mitigate supply risk or demand risk?

If the likelihood is greater that there will be frequent or severe fluctuations in product demand for the supply chain overall, then it's strategically smarter to centralize inventory. When demand drops, disrupting product flow, inventory cost is minimized.

But if the greater danger is disruption on the supply side, curtailing the availability of inbound supplies, then a decentralized inventory strategy is lower risk -- smaller portions of the chain will be affected, lowering the cost of the disruption. Understanding these disruptions, working through which ones are more likely and factoring this into strategic planning can result in more effective risk management. Failure to do so can make every disruption costlier.

"Supply chain disruption can't happen to us."

As global trade steadily rises and the sourcing of raw materials grows increasingly international, it's becoming harder to be dismissive of factors not often seen domestically. Natural disasters, political unrest and labor and energy shortages are all major disruption triggers seldom considered in the U.S. Even changes in regulation and compliance in foreign regions can be highly disruptive. But as more and more foreign participation makes its way into the operations of U.S. enterprises, the potential impact of such events is growing exponentially.

Take this example: "Months-long flooding in Thailand also hurt global supply capabilities in a number of high-tech sectors, especially the disk drive industry, which is hugely concentrated in the country and which came to a near total halt for many weeks," according to Supply Chain Digest. "Intel, for example, said it lost about $1 billion in Q4 sales because computer OEMs were not buying its chips because they were unable to source the hard drives needed to make new machines. Other areas, such as aircraft tires, have also been affected by the Thai flooding."

It's a statistical reality that when the supply chain expands beyond a single region or country and into several, the probability of such disruptions will significantly increase; even dramatically so. To fail to plan accordingly is to take on equally significant risk.

The fix is difficult, but effective: In planning, causes of disruption must be decoupled from mitigation. When disruptive events are random and unpredictable, recovery plans must be independent of them. This requires meticulous effort in identifying alternate suppliers, transportation alternatives and other band-aids, as well as the development of rapid deployment processes for each. It may seem like a great deal of work for nothing -- until an earthquake happens in Japan, as just one example.

"If we can't prevent supply chain disruption, there's nothing we can do."

The distinction between supply chain disruption prevention and disruption protection is underappreciated and too seldom acted upon. Disruption prevention means creating systems and processes to anticipate and avert potentially negative effects of events that might interrupt the supply chain. Protection against disruption means equipping the chain to respond rapidly and effectively to disruption. Though it is impossible to fully achieve disruption prevention, it is not only possible, but fairly simple (and potentially not very costly) to implement effective disruption prevention.

This is true because the mechanisms that can be employed to block disruption are generally already in place in a well-designed supply chain. Inventory management may be modified to better accommodate supply and demand risk, as discussed above; diversified sourcing can be expanded; logistics alternatives can be exploited; and multichannel communications technology can offer messaging redundancy in the network. In short, prevention means doubling down on operations already in place by introducing redundancies that are, in general, not very costly.

Moreover, such disruption prevention measures can be implemented at any point in a supply chain partnership's development, and can be introduced incrementally. Each protective measure reduces risk and minimizes cost -- and, over time, improves network reliability.

When the network's overall reliability is enhanced, every partner wins.

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