It is often said that "a supply chain is only as strong as its weakest link." Why are supply chains increasingly vulnerable to disruption? Critically evaluate the main approaches to mitigating supply chain disruption.
"Supply chain disruptions can have significant impact on a firm's short-term performance" (Tang 2006, p.452).
Before appraising supply chains and the approaches to mitigate disruptions it is useful to understand what supply chains are and what they entail. Businesses are continually trying to predict and respond to consumer demand without enduring expensive costs in the form of excess inventory or stock-outs. To ensure the prevention of these costs, it is vital for these organisations to structure their supply chain systems, managing the underlying processes being deployed (Santhanam, 2009).
A supply chain is a system within organisations which consists of a series of activities, permitting the movement of materials as they flow from suppliers, through operations to the end customers (Slack, N., Chambers, S. & Johnston, R., 2007). They facilitate the transformation of materials and resources into the finished product.
The supply chain definition suggests a simplified view of organisations network within their production process; however it is the successful management of a supply chain that can bestow the real challenge (Taras, 2007).
Supply chain management is about the mechanisms and processes by which the system activities are organized (New, 1997). The management process involves planning, execution, control, and monitoring of these activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand, and measuring performance globally (APICS, 2009).
Today companies face many concerns of increasing competition, complex marketplace pressure, shrinking product life cycles and customers demanding better availability and choice of products. This can result in instable supply chains that are not equipped for any disruptions which can lead to major consequences for the business (Bjelmrot, 2007).
Tang (2006) view that "a supply chain is only as strong as its weakest link", supports Santhanam (2009) illustrating that the initiation of supply chain management is crucial for preventing expenses and facilitating consumer satisfaction. Supply chain risks and disruptions are becoming a growing subject for academic and practitioner research (Marley, 2006). Risks are the exposure to negative consequences of uncertain events beyond normal levels of variability such as recessions, credit crunches and political disruptions. Dealing with these risks is an important part of supply chain management (Slack, et al, 2007).
Within this evaluation supply chain disruptions and approaches to moderate these disruptions will be discussed, finding out how these interruptions affect businesses and obtaining an overall understanding of the supply chain practice.
"Supply-chain risks can become full-fledged supply-chain problems, causing unanticipated changes in flow due to disruptions or delays" (Chopra & Sodhi 2004, p.54).
Supply chain vulnerability can develop from numerous sources and can be external disruptions, such as natural disasters or a terrorist attack; as well as internal, occurring from delays of supply or inaccurate forecasts. Interference can also be the result of companies' attempts to make the chain more efficient (Juttner). With firm's dependent on all other players within the supply network to operate effectively, it is essential that management schemes can embrace the extended supply chain (Marsh, 2004).
Disruptions within supply chain operations can range from natural calamities, such as hurricane Katrina in 2005, labour strikes, bankruptcy, war and terrorism as in attack of September 11th 2001 (Chopra et al, 2004). Most organisations at some time will incur disruptions from labour disputes such as strikes and these can have an impact on all dependent associates. The Royal postal strike (UK) in 2003 had an immediate impact on small firms due to their dependent on their postal service for invoices, contracts and checks (Stecke et al, 2006). However these intentional human acts that cause disruptions to the chain can happen suddenly but be predicted to an extent, leading to a prevention of these types of disruption from existing. In contrast natural disasters are nearly impossible to prevent due to unpredictability.
In addition to the above disruptions, delays are a further factor regularly interfering with operations in the chain such as the dependency on a single source of supply, as well as the capacity and responsiveness of the alternative suppliers (Chopra et al, 2004). The concept of supply chain management examines the competitive advantages of reduce costs, faster product delivery and greater efficiency being accomplished through implementing improved supply chain relationships and strengthening the links within the chain, such as suppliers. This inter-reliant mode can result in disastrous outcomes if a breakdown is present at any point along the system (Bergera, Gerstenfeldb & Zeng, 2004).
Bergera et al (2004) supports Chopra's (2004) view that disruptions can occur from an organisations sourcing strategy or the inflexibility of the supply source. There are increased concerns inside organisation on sourcing alternatives and the evaluation of single sourcing strategies versus multi-supplier strategies has generated. Considering that effective supply chain management is achieved through improved relationships between companies and suppliers, the single sourcing strategy seems appropriate to produce these long-term partnerships. Lummus & Vokurka (2007) support this exclaiming that companies need to integrate and work together with their suppliers and components to be successful. Faisal, Banwet & Shankar (2006) concur by stating adopting a closer relationship with suppliers and creating a trust value are the factors to reduce supply chain risks, favouring the single sourcing strategy.
However Bergera et al (2004) argue that companies can benefit from the multi-supplier approach, playing supplier off supplier in order to generate a competition aspect and obtain the lowest prices and shipping costs. Incorporating multi-suppliers could also decrease the risk of vulnerability to the chain, as required components can be obtained from another source in the event of a disruption (Bergera et al, 2004). This is evident in the case study of the phone manufacturers Nokia and Ericsson, when after their supplier was hit by a natural disaster, Ericsson's single supplier policy left their supply chain in crisis, in contrast to Nokia's multi supplier strategy and fast responsiveness, experienced little disruptions to their production, by switching orders to other suppliers (Chopra et al, 2004). Bjelmrot (2007) also agree that single sourcing can be a driver for supply chain disruptions.
Initiatives on creating efficiency within the supply chain can also add to the complexity of supply chain risk. For instance adopting just-in-time (JIT) manufacturing and delivery techniques can become "just-too-late" if something goes wrong (Marsh, 2004). Or trying to cut cost by introducing a lean supply chain, decreasing the inventory can lead to the creation of increased vulnerability to disruptions within the chain (Chopra et al, 2004).
Vulnerability within supply chains can also transpire from forecast inaccuracies, systems breakdowns and capacity issues (Chopra et al, 2004). Forecasts inaccuracies can be problematic to recover from. The involvement of middle-men handling from outsourcing activities increases the possibility of an external interruption and amplifies the difficulty of foreseeing a brewing glitch in the chain, reducing ability to react to disruption efficiently (Stecke et al, 2006).
The phenomenon of the bullwhip effect illustrates the distortion increasing in the supply chain as you get farther away from the end consumer, which can cause excess inventory and sustain expensive costs (Chopra et al, 2004). This can result in inaccurate forecast being produced within operations.
Understanding the risks leads to development of effective emergency response strategies within the supply chain to react, manage and recover from the unavoidable. Hale & Moberg (2005) observed security measures have increased from the terrorist attack of September 11th 2001, with increased tracking and routing of materials and risk management programs. This illustrates that schemes are being created to prepare against future terrorism disruptions and the ability to effectively manage the supply chain by understanding potential impacts of various disruptions can create a strategic advantage in a competitive marketplace (Marsh, 2004). Conversely Stecke & Kumar (2006) argue that the security will not eliminate terrorist attacks so further strategies need to be considered.
In today's society supply chain management has evolved to focus on buyer-supplier relationships, supply chain integration and supply chain sustainability. Companies rely more on third-party logistics services (3PL) and Radio-frequency identification (RFID) to improve efficiency of inventory tracking and management (Slack e al, 2007). These services and technology permit effective supply chain management to meet the ultimate goal of reducing inventory, but still maintaining their production in the case of a disturbance, by acquiring the essential input (Bjelmrot, 2007). However, management of supply chain risks can be quite difficult as individual risks are often interrelated. This means moderating one risk can end up exacerbating another and result in increasing the impact of the disruption to the supply chain (Chopra et al, 2004).
Supply chain risk management and mitigation techniques
".... the drive towards more efficient supply chains during recent years has resulted in the supply chains becoming more vulnerable to disruption" (Juttner 2005, p.121).
Supply chain disruptions can have significant impact on a firm's short-term performance but can also have long-term negative effects on a firm's financial performance (Tang, 2006). For instance Apple obtains PR black eye and losses PC market share, which it never really recovers from, after inaccurate forecasts of demand left them unable to deliver the goods (Slack et al, 2007). This illustrates the importance of managing risks and mitigating supply chain disruptions.
Tang (2006) defines supply chain risk management (SCRM) as "the management of supply chain risks through coordination or collaboration among the supply chain partners so as to ensure profitability and continuity". Translating that "a supply chain is only as strong as its weakest link", and for a successful network all partners within the chain must perform exceedingly. Understanding the type of risks that exist within your operation can influence tailored risk reduction and mitigating approaches. Leading manufacturers such as Dell, Toyota, and Motorola excel at identifying risks to their chains, and at creating influential mitigation strategies that neutralize potentially negative effects (Chopra et al, 2004).
Ueltschy, Stank & Mentzer (2009) state that risk management and mitigation techniques have emerged as central elements of successful chain management strategies, although they can be challenging to implement. To mitigate the impact of supply chain risks, Tang (2006) suggests there are four basic approaches consisting of supply management, demand management, product management and information management that firms can embrace through synchronised methods.
One paper (Stecke et al, 2006) examining the key approaches to supply chain management and mitigation techniques separates the strategies into four categories, Proactive, advance warning, coping and survival strategies. Proactive methods are used for avoidance or decrease of prospective risks, such as choosing locations that are less susceptible to natural catastrophes for instance geographical regions more susceptible to earthquakes. Other proactive measures contain selecting a transport network that has the ability to handle disruptions providing stability, establishing secure communication links and enforcing security.
Chopra et al (2004) study declares which mitigation strategies work best with certain risks. To counter disruptions, it is building inventory or having redundant suppliers that is promoted, as it is unlikely that multiple suppliers will be disrupted simultaneously. Natural disasters are a rare event, which means building the inventory could incur holding costs for the business. However managers have to consider which cost is less severe - a stock-out due to a disruption or the holding cost of inventory.
Delays often occur due to supplier's activity and organisations can prepare or avoid these risks by adding additional capacity and inventory, and increasing responsiveness, flexibility and capability. Forecast risk can be reduced by an increase in companies' responsiveness and increase in demand information visibility across all components of the supply chain. This will help lessen the sting of the bullwhip effect if all partners have relevant information for each of their operations (Chopra et al, 2004).
Another mitigation strategy endorsed by Chopra et al (2004) is preventing and managing inventory risks by incorporating additional capacity, using multiple suppliers, increasing responsiveness, flexibility and capability. The main risks incurred from inventory are stock outs costs, obsolescence costs and storage costs, which can all create significant expense for businesses.
An example of successful supply chain risk management is observed by Norrman & Jansson (2004) article describing how Ericsson, after the fire incident in Albuquerque implemented a new proactive risk management approach, working close with suppliers employing specific requests on them. Ericsson attitude is that everyone is a risk manager, engaging all components and staff with the goal to minimise risk exposure within the chain.
Their process embraces risk identification, risk assessment, risk treatment (management) which corresponds with Juttner (2005) fundamentals in risk management, but it has also added a process step for risk monitoring. This improved management approach has been put into practice through numerous incidents and has had a positive impact on the business. It has also contributed to the process of demanding more information on the risks within supply chains (Norrman et al, 2004).