To understand the benefits of containment, we used a different model to evaluate the fragility or increase in cost of the supply chain in the event of a disruption and identified the relationship between fragility, network connectivity and the extent of the disruption.

Companies could elect to deploy different strategies in different settings or at different times. In many instances, it is not an all-or-nothing proposition. The alternative is to reconfigure supply chains to better handle disruptions, while accepting any effects on cost efficiency. To avoid increased costs, a manager might choose to do nothing to prepare for “acts of God” or force majeure. How should executives lower their supply chain’s exposure to disruptive risks without giving up hard-earned gains in financial performance from improved supply chain cost efficiency? Disruptions are usually well beyond a manager’s control, and dealing with them can affect a supply chain’s cost efficiency. Low-cost offshore suppliers with long lead times leave companies vulnerable to long periods of shutdown when particular locations or transportation routes experience problems. Although sourcing from or outsourcing to distant low-cost locations and eliminating excess capacity and redundant suppliers may make supply chains more cost efficient in the short term, such actions also make these supply chains more vulnerable to disruptions - with potentially damaging financial implications when they occur. However, reliance on sole-source suppliers, common parts and centralized inventories has left supply chains more vulnerable to disruptive risks. As a result, the 1990s saw big jumps in supply chain cost efficiency. Since the mid-1990s, managers have become much better at managing global supply chains and mitigating recurrent supply chain risks through improved planning and execution. They can normally be covered by good supply chain management practices, such as having the right inventory in the right place. By contrast, recurrent risks such as demand fluctuations or supply delays tend to be independent. Such a risk can’t be addressed by holding additional parts inventory without a substantial loss in cost efficiency. Although both require dealing with risks, recurrent risks (such as demand fluctuations that managers must deal with in supply chains) require companies to focus on efficiency in improving the way they match supply and demand, while disruptive risks require companies to build resilience despite additional cost.ĭisruptive risks tend to have a domino effect on the supply chain: An impact in one area - for example, a fire in a supply plant - ripples into other areas.

Supply chain efficiency, which is directed at improving a company’s financial performance, is different from supply chain resilience, whose goal is risk reduction. After all, financial performance is what pays the bills.

1 This is because solutions to reduce risk mean little unless they are weighed against supply chain cost efficiency. Surveys have shown that while managers appreciate the impact of supply chain disruptions, they have done very little to prevent such incidents or mitigate their impacts. Today’s managers know that they need to protect their supply chains from serious and costly disruptions, but the most obvious solutions - increasing inventory, adding capacity at different locations and having multiple suppliers - undermine efforts to improve supply chain cost efficiency. The 2010 eruption of a volcano in Iceland disrupted millions of air travelers and affected time-sensitive air shipments. Thailand’s 2011 floods affected the supply chains of computer manufacturers dependent on hard disks and of Japanese auto companies with plants in Thailand. In addition to taking many lives, the Japanese tsunami in 2011 left the world auto industry reeling for several months. Although Zara, an apparel retailer based in Spain, produces its trendiest items in European factories, the company segments its supply chain and sources basic items such as white T-shirts from lower-cost locations.įor supply chain executives, the early years of the 21st century have been notable for major supply chain disruptions that have highlighted vulnerabilities for individual companies and for entire industries globally.

Supply chain risk manager