While these new business paradigms have resulted in more efficient and responsive systems, the supply chain risk profile has been altered significantly. Many companies have been left vulnerable due to anemic risk mitigation systems, and these systems have yielded to major variations in demand or supply caused by unforeseeable events, both natural and man-made. Caught unaware by such disruptions, these companies have suffered losses of revenue, market share and consumer trust, and in some cases have even faced bankruptcy.
Supply Chain Disruptions Can Be Painful
In last year's Japan earthquake, tsunami and nuclear crisis, Toyota’s operations were affected to the extent that it took over six months before complete recovery was possible. The delay in the launch of two models caused an estimated production loss of over 140,000 vehicles, the company's profits fell by over 30% and it lost its position as the largest automaker in the world.
Of course, not all supply chain disruptions are caused by natural disasters. Cisco rode the technology wave in the 1990’s to become the market leader in the network component business, but it had no experience in managing downturns. When the tech bubble burst and demand slowed significantly, the company did not have the capability to track the inventory of products across its geographically-spread supply system. Their systems were designed for high responsiveness, which meant high inventory buffers. Lack of inventory tracking capability resulted in high inventory accumulation which in a bust market led to the eventual write-down of $2.2 billion in 2001 alone.
Broadly defined, a supply chain disruption is an unusual spike or steep fall in either demand or supply leading to a huge imbalance between the two. According to Jossi Sheffi, director of the MIT Center for Transportation and Logistics, "The essence of most disruptions is a reduction in capacity and hence inability to meet demand." Companies cannot afford to treat supply chain disasters as 'black swan' events that have a negligible chance of happening.
Recent studies suggest that less than 25 percent of Fortune 500 companies are prepared to handle a supply chain crisis and that a $50 million to $100 million cost impact can be incurred for each day a company’s supply chain network is disrupted. (Alpaslan, April 2003) As part of a research study on supply chain risk and its impact on equity volatility, Prof.Vinod Singhal and Kevin Hendricks concluded that it could take two years or more for companies to recover from a major supply chain failure. (Hendricks, 2003)
What is a Resilient Supply Chain?
As illustrated in Exhibit 1, disruptions happen for various reasons and the nature of their impact also varies. For example, a labor union problem can be anticipated whereas a terrorist attack is unforeseeable. Also, the time taken for the impact to be felt differs and is unique to each disruption and to each company. For instance, a fire in a factory can potentially halt operations immediately, whereas the outbreak of an epidemic in a supply zone could have a more subtle impact and will take more time to set in. Companies with a resilient supply chain will be able to anticipate these events better than their peers, and will be able to delay and minimize the impact of the disruption by taking proactive risk-mitigating steps.
Following the September 11, 2001 tragedy, U.S. flags, lapel pins and other patriotic objects became extremely popular, but consumers had a difficult time finding them in major retailers like Kmart and Target. That's because Wal-Mart, using its real-time demand tracking and analysis system, responded swiftly to the situation by locking up all the supply resources they could find.