Significant advances in communication worldwide and the enormous increase in data processing capacity generated exponential growth in the Supply Chain (SC) complexity revealing a substantial rise in risks globally.
Main typical Supply Chain risks are:
· Natural disasters worsening, causing interruption at some connections.
· Sudden and pronounced changes in demand.
· The failure of a partner in the extended chain, either a supplier or distributor.
· Sudden fluctuations in prices or unavailability of essential inputs.
· Interruption in some links due to social or political events.
· Inflation on the rise.
· Pandemic persisting.
· Fraud escalating.
· Transportation and Logistics constraints.
· Despair of retailers to get shelves well-stocked.
· Pipeline attacks, increasing oil prices.
Risk managers call these conditions’ VUCA’ that stands for Volatility, Uncertainty, Complexity and Ambiguity. These factors seem to be escalating but are not new, since more than a decade ago, there were warnings to SC managers to awake to a new reality of such conditions.
As James Johnston, Vice President at Cloudera, concluded, “Supply Chain is considered the lifeblood of the global economy. When it falters, the knock-on effects can be tremendous.”
SC disruptions have reached new heights in recent months as operations become particularly vulnerable to events causing SC risks, most of them difficult to predict. The correct data and the right analytics can help organisations cope with any eventuality avoid issues in the SC that restrain profits.
A good business should react to changes and adjust its plans according to market conditions, mitigating risks. Some companies mistakenly assume that risk is likely to be reflected in a complicated mathematical model, the reason why the probability of anticipating a potentially catastrophic event is very remote.
Therefore, we must base any successful strategy on mitigation and contingency plans plus the agility and accuracy of the response at the enterprise level. The speed of response, the existence of an action plan, and chain Flexibility are essential elements to face disruptions.
Modern SCs are particularly vulnerable to optimising approaches in the SC by eliminating much of the inventory. It depends on maintaining close contact with suppliers, customers and carriers to get quick answers.
Any failure could jeopardise the whole operation; for instance, the elimination of alternative routes or when suppliers provide indispensable products and cannot easily replace them during the process; it contributes to profit reduction and increases the company exposure to risk. The lack of visibility at the most vulnerable points in the SC results in sudden changes.
Several SC specialists consider two key concepts to define the organisation approach in the face of risk: Redundancy and Flexibility. Although these two concepts are antagonistic in appearance, they provide the best possible defence against threats when appropriately combined.
With the ever-increasing manifestation of natural disasters, organisations focus on having a Redundancy of operations. Redundancy serves as a secondary system that, in the event of any failure, lessens the risk of unplanned downtime and remains operational, protecting your bottom line; a secondary system covers safety inventories, raw materials, products in-process and end-products. However, very few organisations can maintain redundancies of this kind on a large scale.
Flexibility, the other key element, play a preponderant role. This concept is based on the interchangeability of pieces in the SC agile and effective way. It also is described as: ‘Flexibility is the ability to create redundancy without incurring in the costs that it implies.’
When companies fail to make their SCs more resilient, bad things happen, contributing to the loss of visibility and poor responsiveness when circumstances change. Recent SC disruptions reflect the severe shortcomings when no backup plan is available.
Advanced Analytics and business data allow companies to have a completely transparent view of the movement of materials and products within their sightline. In addition, these tools can leverage your suppliers’ data to take an in-depth holistic view into two or three SC levels.
Both Redundancy and Flexibility ultimately help companies reduce SC risks. Therefore, business leaders should consider developing a robust framework with a responsive and resilient risk management operations capability. Better strategies and investing in statistics and the application of Big Data analytics increases scalability and demand-driven management decisions.
Conclusions: organisations must formulate a Risk Management strategy based on a rigorous understanding of the vulnerabilities of the extended SC and the application of containment and mitigation schemes based on the right combination of Redundancy and Flexibility. They can react to changes and adjust their plans according to market conditions, mitigating risks.
Is your organisation implementing a Risk Management plan to protect your Supply Chain from unexpected risk?
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