Many companies have a complex and globalized supply network, and while that offers numerous benefits, it can also mean a company is vulnerable to supply chain disruptions caused by events halfway around the world.
In order to prevent supply chain disruptions caused by disasters or catastrophic geopolitical events, companies need to assess their supply networks to see where a supply chain is exposed to significant risk and which chains are crucial to company operations.
In an attempt to mitigate for unpredictable supply chain disruptions, a team of business and management experts have developed a complex mathematical model, according to a report in Harvard Business Review.
How the model works
The risk model is based on the time it takes a particular point in a supply chain to be fully restored after a disruption, a factor dubbed “time to recover (TTR).” The model’s makers based TTR values on historical data and surveying a particular company’s suppliers
To conduct an analysis of a business’s risk exposure, the model eliminates one node at a time from the supply network for the TTR period and establishes the supply chain response that would reduce the impact of the interruption at that particular node.
Obvious and hidden risk
The researchers found many companies focus risk-management efforts on suppliers they do a lot of business with to acquire principal supplies. Risk-mitigation plans for these important supply chain nodes include offering incentives for suppliers to have manufacturing sites in different locations, following suppliers’ performance and developing continuity strategies.
In order to handle this kind of risk, companies can incentivize suppliers to operate several production sites, or a company can establish dual-sourcing strategies.
While companies often have contingency plans for their biggest suppliers, companies are subject to substantial exposure from “hidden risk” suppliers, the Harvard team said. With these suppliers, overall spend is low but the fiscal impact of a disruption is high.
Even the smartest managers can fail to take into account that low-spend suppliers, often of common goods, may be outsize risks. Conventional risk-assessment exercises neglect these suppliers because they are regarded as adding little value to the firm’s products. But the reality is that for markets, commodity goods are generally dominated by only some manufacturers – leaving purchasers vulnerable aren’t the most essential parts to a carmaker. If their supply is interrupted, the carmaker will have to close down the production.
Companies can also use versatility to deal with hidden supply risks, the Harvard team suggested.
For instance, by changing its mix of ingredients, Pepsi was able to rapidly react to a supply interruption caused by a fire near one of its suppliers. Likewise, product-design flexibility made it possible for Nokia to recover rapidly from a disruption of its availability of radio frequency chips brought on by fire at a supplier’s factory. Finally, changing processes allowed Toyota to rapidly restore the supply of a certain kind of valve after a significant disruption.
At ZDA, we know that risk mitigation often depends on having the right personnel in place. Work with a top supply chain recruiter if your company is looking for top supply chain talent. Contact us today.