The recent Toyota brake pedal disaster is an example of a massive failure in product design magnified by supply chain lead time. Current cost estimates total at least two billion dollars, not including future lost sales from the damage to consumer confidence.
When quality problems like this occur, supply chain lead time often determines the time required to resolve the problem. The cycle times in a vast global supply chain like that of Toyota further increase the problem.
The supply chain is the lifeblood of the corporation; it determines the overall health of your business. Sales revenue depends on the supply chain delivering product availability. Sixty to seventy percent of a firm's cost is typically controlled by the extended supply chain. Inventory is managed by the supply chain, and is at the heart of working capital levels. The supply chain also determines levels of physical capital by managing the utilization of factories, warehouses, and space in retail stores.
It follows that it's essential to have a disciplined process in place to identify, prioritize, and manage the wide range of risks that can impact you supply chain. But many supply chain executives often find themselves at the center of the storm, striving to balance very demanding operational objectives with the need to satisfy customers, cut costs and help grow revenue. They must find ways to operate successfully today, yet also improve rapidly to be competitive in the future. Improvement basically means getting projects done efficiently and fast, leaving little time to consider risk.
Since the life blood of the corporation flows through its supply chain, changes to it can carry huge risks. Supply chain disruptions can result in a devastating impact on shareholder value; with one study showing an average 40 percent decline in share price due to supply chain disruptions.
Clearly, it is extremely important that a supply chain outsourcing strategy identify risks. But in the research done by HBS, they find a lack of any process to identify, prioritize, manage, and mitigate risks. In our database of hundreds of companies, we frankly find that most firms ignore risks, sometimes with dire consequences. Our data show that when companies analyze global outsourcing decisions, they fall into three categories. Those who:
- add a risk assessment, 10%
- look at unit cost plus transportation only, 35%
- include inventory as part of the assessment, 55%
In other words, 90 percent of the firms do not conduct a risk assessment when outsourcing production. Yet, sourcing offshore carries myriad additional risks such as political instability, port disruptions, currency swings, demand swings, and more. Unforeseen events occur more frequently in very long global supply chains.
And it is not just the global environment that creates supply risk. There is plenty of it in almost every major initiative. For example, a supply chain professional from a toy retailer told of trying to implement a new fulfillment system that went far over schedule and budget. The Christmas spike exploded before the fulfillment system was complete, resulting in an inability to process orders. People throughout the company worked 50 days straight, including Sundays, to try to stay ahead, yet the firm was forced to send thousands of letters saying, "Sorry your toy order will not arrive before Christmas."
The evidence is overwhelming: Supply chain strategy demands formal risk assessments. So the question is ‘Do you have a supply chain risk management process in place?’
(Source: Harvard Business Review)
(Image source: Nysscpa.org)
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