Adding Resilience to Your Supply Chain
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Natural disasters and other events have exposed weaknesses in lean global, regional, and domestic supply chains, disrupting connections between companies, their suppliers, and their customers. In the next phase of supply chain development, companies are creating ways to circumvent disruptions and minimize their impact on the business. This C.H. Robinson whitepaper looks at the issues companies should consider when developing a more resilient supply chain.
For decades, finding efficiencies has been the primary driver in evolving supply chains. Companies have promoted "problem solving to drive out waste and rely on just-in-time flow, a process that is determined by customer demand," says Jon Miller, The Necessity of Redundancy in Lean (Quality Digest, April 30, 2010).
As efficiencies have increased with Lean and similar systems, highly optimized networks have been developed, lowering inventory and other costs. But a series of well-publicized events that compromised supply chains has prompted many leaders to wonder if an operation can be too lean.
In the past, disasters were felt primarily by companies in an affected region. Now, problems that used to be isolated to a region can have far-reaching impact on many supply chains, especially those that are lean and global. Their suppliers and customers can be located anywhere in the world. Inventory that is strategically positioned for lean operations may be poorly situated to serve key customers if disruption occurs.
While gaining efficiencies and reducing costs will remain high on the list of priorities, analyzing different levels of risk and building in resiliency is the next frontier in supply chain management. Financial models assess different levels of supply chain risk on the overall balance sheet—carrying costs, inventory, and cycle times. C-level executives seek mitigation strategies for natural disasters or man-made events that could interfere with business interests. In this era of scrutiny, managers with compelling ways to add resiliency to the global supply chain and help the overall company's profit and loss will have arguments that leadership is ready to hear.
Developing a resiliency plan is now a must for any company. But global companies—especially those with high-value, high-demand products coming from multiple locations—are most likely to need such plans. Certain industries are particularly vulnerable to disruption. Retailers and brand name pharmaceutical companies require speed to market to keep sales channels open and customers satisfied. Manufacturers need raw materials and supplies at planned intervals to prevent downed plant lines and maintain machinery. Food and beverage companies must be able to trace problems back to their source in multi-tiered supply networks, and understand divergent regulations for food quality around the world, according to Deloitte Insights' Supply Chain Risk: Answers to Five Often-Asked Questions (The Wall Street Journal, April 19, 2013).
For global organizations, it may be less obvious where process and supply gaps exist. Even though many of these companies use transportation management systems (TMS) to achieve efficiencies, few of those systems provide global visibility. Incompatibilities in technology, language, culture, and regulation between and across continents can prevent identification of transportation and operational chokeholds.
Yet, certain considerations can help build backup plans for more resilient supply chains and help companies adapt to changing circumstances while maintaining their central objectives, says IDC Energy Insights in 2014 Predictions: Worldwide Oil & Gas (Dec. 11, 2013).
Companies with resilient global supply chains are more likely to have goods available when they need them, and to be able to continue serving customers without disruption. And because they can see their inventory, they are less likely to spend unnecessarily to transport emergency supplies. "The 'hardened' enterprise will be able to not only withstand all manner of disruption, but also increase its competitiveness," says Yossi Sheffi in Building a Resilient Supply Chain (HBR Blog Network, Aug. 14, 2007). "Unforeseen disruptions can create shortages that are not dissimilar to the demand spikes caused by supply/demand imbalances; resilient enterprises can thus react to changing market demand ahead of their competitors."
Mapping the Supply Chain to Find the Gaps
Identifying potential chokepoints in the global supply chain is the first challenge. Maps can be simple or highly complex, but they help the company visualize where the greatest risks can be found.
As a neutral third party, a consultant or provider can work with key stakeholders from across the organization and provide insight on the supply chain's current state. As each stakeholder explains how orders flow from supplier to customer, the consultant combines all perspectives in a single page map. Process flow maps simultaneously reveal efficiency gaps and potential risks for analysis (see Figure 1).
Figure 1. PROCESS FLOW MAP
As a neutral third party, a consultant or provider can work with key stakeholders from across the organization and provide insight on the supply chain's current state. As each stakeholder explains how orders flow from supplier to customer, the consultant combines all perspectives in a single page map. Process flow maps simultaneously reveal efficiency gaps and potential risks for analysis.
As companies experience significant changes in their operations (e.g., mergers and acquisitions, factory closings, customer gains or losses), they can enlist help from a logistics expert to model the current and future network. Network modeling reveals where materials and inventory are located, and how end customers are served through distribution channels. The map shows where the company has the biggest inefficiencies and the greatest risk. Detailed analysis leads to recommendations on where vendors and distribution points are, and where they ideally will be positioned (see Figure 2).
Figure 2. NETWORK MODELING MAP
Companies that plan for service disruptions gain an advantage over less prepared competitors in providing continuous service to customers.
Global network modeling requires not only data, but deep knowledge of local and regional complexities. It is not equally easy to do business in all regions of the world. Some countries have complex provincial and state government regulations. These regulations make it essential to carefully choose the ideal location and type of warehouse to perform the necessary operational tasks.
Dr. Bruce Arntzen, researcher at Massachusetts Institute of Technology's Center for Transportation and Logistics, is developing Hi-Viz Supply Chain displays that gather data from corporate databases, such as enterprise resource planning systems. The program automatically generates several types of flow diagrams and maps of a company's supply chain. Visual displays of risk events can be superimposed on top of supply chain images to show chokeholds. Information that can be displayed includes:
- Locations of plants, suppliers, customers, and major transportation lanes.
- Alerts of natural disasters, strikes and protests, or infrastructure failure.
- Heat maps (frequency diagrams) of hurricanes, floods, or earthquakes.
- Inventory deployment (dollars and days of supply) across the network.
- Risk pathways (most vulnerable segments) across the network.
- Risk exposure and value at risk for each location in the network.
- Predicted "customer blackout days" from the loss of any site or lane in the network.
With Hi-Viz Supply Chain maps (see Figure 3), companies can identify which nodes of a supply chain could be disrupted and answer questions like these:
- Where is the weakest link? What is the probability that the node will be disrupted?
- What are the downstream ripple effects of the loss of a node or link in the network? What downstream plants, DCs, and customers will be disrupted, and at what cost?
- What supply chain actions would make the company less vulnerable (e.g., backup suppliers, extra inventory, overlapping DC coverage)?
- Where to begin: across the network, what is the highest risk?
Figure 3. HI-VIZ SUPPLY CHAIN TOOLS
Hi-Viz Supply Chain tools offer a variety of maps and flow diagrams of the supply chain's plants, suppliers, customers, and major transportation lanes.
While it is impossible to prevent all supply chain risk, global companies can and should assess how much risk they can tolerate and develop a plan to mitigate the most likely risks to their business.
Here are some tips to help reduce risk:
- Find alternate sources for critical materials if there is only one supplier. Also verify that suppliers have assessed risk with their own vendors, and that they have more than one source for essential materials.
- Consider interchangeable parts or products. If certain materials become unavailable, there may be similar materials or products that could be substituted. For example, U.S. cities banned the use of triclosan from antibacterial hand soaps when the ingredient was linked to brain damage and cancer (Ethan Huff, FDA may ban antibacterial soap ingredients such as triclosan, Natural News.com, Dec. 20, 2013) Manufacturers responded by substituting a similar product without this ingredient to satisfy regulations and customers.
- Ensure there are alternate distribution solutions if suppliers and customers are in the same region. If disruption occurs, suppliers may need to reroute products to keep manufacturing underway, or open a facility closer to key customers to keep product flowing.
- Develop plans for safety stock. Regional strikes can shut down a supply chain, making it impossible to serve customers. Having a critical part held up at an international border can shut down a production line. Smart, well-intentioned, lean inventory management can present more areas of risk that can disrupt a supply chain. Consider what it will mean if key customers cannot be served for a day, a week, or a month. Some companies maintain one day or more of safety stock close to key customers. If a temporary disruption occurs, they can examine forecasts and point-of-sale data to determine priorities and deploy the safety stock until regular shipping can resume.
- Set up forward stocking locations. Consider positioning non-critical parts close to customers. That enables better speed to market during temporary disruptions while lowering costs.
- Create parallel supply chains. When product launches are essential to profitability, a parallel supply chain can directly connect independent production facilities with sales sites, bypassing the traditional supply chain.
- Consider postponement. Ramping up all inventory increases carrying costs and inventory expenses. To control costs and add resilience, shippers can hold off on deliveries until they have a better sense of when a disruption will be over, or until they can gain more clarity on customer demand. Fast-moving SKUs can be positioned regionally, close to customers; lesser-used SKUs or products can be moved farther back in the supply chain and sent to the regional DCs as needed. Similarly, manufacturers can place most-used components closer to manufacturing facilities for faster access when they need to step up production.
- Consider tradeoffs and risks when choosing locations for sourcing or distribution. During the threatened West Coast port strike, shippers developed alternate strategies to bringing product to the West Coast and trucking it east. Some shipped from Asia through the Panama Canal and to the West Coast and from Asia to Canada to the United States. Others moved supply sources to Mexico; for them, having lower transportation costs and inventory closer to U.S. customers outweighed the risks of potential crime, theft, and governmental issues.
- Leverage all types of transportation. Introduce newer members of the team to the full range of logistics options, and help junior employees recognize the best options.
- Teach employees how to evaluate risk/cost/service tradeoffs. Velocity of delivery is a consideration in air-to-ocean, consolidated-air-to-direct-air, and truck-to-rail combinations. Even within a single transportation type, there are tradeoffs. Ocean freight that goes to direct port of call has a shorter transit time, but costs more; ocean shipments that stop at multiple ports of calls have longer transits and lower costs for transportation. But the more vessel stops there are, the greater potential there is for delays and disruption.
- Have an expediting strategy. Not all freight needs to be expedited if disruption occurs. For instance, rather than sending whole truckloads by air after a disaster, work with customers to airfreight only what they need immediately, and truck the rest.
- Conduct thorough due diligence on potential transportation providers. As with suppliers, working with reputable providers can help reduce unexpected supply chain failures.
- Make sure all data has a backup. Whether the system belongs to the company or a provider, ask what the disaster recovery plan is and how often it is tested.
- Your backup should have a backup. If the backup goes down, a good, resilient plan will be ready for continuous or fast recovery.
- Safeguard critical data. Employ vigilance and advanced security measures to protect the company's information and reputation, and ensure system stability, integrity, and performance.
Does Redundancy Have a Place in Lean?
How lean is too lean? As well-known brands have suffered through highly publicized service disruptions in recent years, that question has gained renewed attention in corporate boardrooms. The focus on hyper-efficient supply chains reveals that "fewer parts and fewer suppliers can drive down material costs and radically simplify operations," note Glendon, Lee, and Lyndon Bird in the 5th Annual Supply Chain Resilience Survey, Business Continuity Institute (BCI), April 2013. "But when a strategic supplier of a critical part encounters a hiccup, it can have crippling and costly implications for the enterprise." The company in the case study is similar to companies surveyed by BCI. They asked 519 global shippers whether key suppliers would declare them a priority customer in the event of a disruption; 64 percent said they either did not know where their organization would be in the ranking or knew for only some key suppliers.
Complete redundancy is cost-prohibitive, but some redundant stock, systems, and resources can help avoid the waste of system breakdown if a disaster occurs, even in a highly efficient supply chain. Companies can look at key raw materials, customers, and lanes where having a solely financially driven plan is not an option the business can afford. In addition, shippers can consider questions about suppliers, inventory, transportation, and technology to discern how much risk is tolerable and develop the "what if" questions and solutions that can lead to resilience.
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