Recognise the risks of disruptions in your supply chains

Roger OakdenGlobal Logistics, Logistics Management, Logistics Planning, Procurement, Supply Chains & Supply Networks

Vehicles at car assembly plant

The present challenge

Supply Chains carry risks, both minor and major. A major risk to supply chains could be the current Coronavirus outbreak. This is due to uncertainty about its duration and the long term impact on economies and supply chains.

As China is an integral part of global supply chains, a decline in its output has the potential to disrupt global production. The ‘known-unknown’ challenges for supply chain professionals, due to an expected reduction in economic activity within China, are the disruption to both outbound supply and inbound supply chains for components and raw materials.  

Among the unknowns to be considered and allowed for are:

  • how long businesses in the cities and provinces of China will remain closed following factory closures for the Lunar New Year holiday that were extended
  • the impact on inbound and outbound supply chains for different industries
  • the precautionary measures taken by customers, shippers, contract manufacturers and logistics service providers

The centre of the virus outbreak, Wuhan and Hubei province, is a region for vehicle assembly and component parts production. Wuhan is also a centre for the production of pharmaceuticals and electronics. Even when final assembly is undertaken in other counties, there remains a reliance on China for some critical parts.

To reduce the financial impact on companies, ‘Force Majeure’ certificates are being issued, to validate China based customers’ claims that they cannot meet contractual obligations to accept deliveries. While some suppliers are objecting to this tactic, negotiations will be required to reschedule inbound and outbound deliveries.

When the outbreak is (hopefully) contained, contract manufacturers will take some time to achieve full output. In that time, they will allocate deliveries between customers based on available capacity and the attractiveness of a customer’s order history. However, there will be delays for all customers that will affect deliveries and sales.

Because of the publicity surrounding the current crisis, other developments in supply chains may not receive due attention. But these can have an influence on supply chain decisions. For example:

  • The Baltic Dry Index, which tracks freight rates for dry bulk carriers is at low levels. It has reduced by more than 80 percent from September 2019. This indicates an ongoing lack of demand for capacity and vessels that commenced prior to the virus crisis
  • The traded oil price has reduced by nearly 20 percent in 2020 (again, commencing prior to the virus crisis). Inventories of jet and vehicle fuels are increasing as demand is reduced
  • Due to weaker vehicle sales in the US and the US-China trade dispute, export to the US of vehicle parts from China were substantially reduced in the second half of 2019; again prior to the virus crisis

To complicate the situation, the stage one trade agreement between the US and China becomes a risk, because China’s agreed import targets for US commodities and manufactured items will be difficult to achieve. Although there are ‘get out’ clauses for events beyond China’s control, the ongoing verbal dispute about trade and tariffs will provide additional uncertainties.

What is your response?

So, is your supply chain group ready to execute Plan B when things go wrong? If not, meetings to ‘make things happen’ that happen late into the night are unlikely to yield the required outcomes. But they do demonstrate an ‘action’ team at work!

To combat the effects of Uncertainty, most businesses would appreciate more data from their supply chains, to inform decisions concerning actions that mitigate the risk of disruptions. In the US, a major retailer is reported as preparing to force suppliers to use technologies that provide transparency of item movements from origin to store.

However, the previous experience of a major US retailer trying to force suppliers to comply with an RFID directive indicates that using buyer power in supply chains may not always be successful. Also, the research firm Gartner has stated that Blockchain, the technology most applicable for track and trace applications, is unlikely to achieve ‘commercial, off the shelf’ (COTS) status until about 2028.

Planning your supply chains

So, what to do? How can you plan to address uncertainties in supply chains, such as the current virus (Coronavirus) outbreak, trade disputes and global warning? Instead of hoping that technology will solve the problem, an approach is to build on the basic planning elements for your supply chains. However, that is a difficult sell, as it does not have the impact of promoting ‘end to end’ supply chains and its promising technologies.

To work with customers and suppliers involves three teams or departments that may or may not operate as a supply chain group. They are Procurement, Operations Planning and Logistics. Depending on the business, there could be other functions within the group.

One of the roles for the group is to identify and reduce uncertainty in supply chains. An analysis of uncertainty identifies the Risks to the business, which are influenced by the:

  • Complexity of processes at customers, internally, contractors and suppliers
  • Variability in customer and supplier markets and demand for items
  • Constraints that limit the Availability of items – speed, quality of the process, flexibility, dependability and cost. Examples of Constraints in supply chains are: location decisions based on volume to weight and value to weight ratios of materials and products and inventory form and function decisions; product security requirements; lead times and internal capacity

Rarely discussed, but necessary for understanding risks in your supply chains, is the extent of power exercised in each supply chain and by which organisations. Also, the corresponding extent of dependency by customer and supplier organisations on a supply chain. These affect how each of your supply chains will operate, concerning availability and flows.

Inside your organisation, the internal complexity, variability and constraints will influence performance. Therefore, results are emergent (i.e. unknown), with poor explanations and choices for improvement.

Over the years, there has been much written and discussed about businesses being ‘demand driven’. However, this cannot exist without a structured process for balancing ‘demand driven’ with ‘supply supported’. If there is not a structured process i.e. Sales & Operation Planning (S&OP, then the chances are not high of having an effective supply network, or even individual supply chains within your network.

So, using a planning process, analysing uncertainty and evaluating power and dependency in your supply chains are some of the basics. They take work to be successful and time to understand and implement.

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About the Author

Roger Oakden

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With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More...