Tesla announced in early April that it was unable to meet its delivery target of 16,000 vehicles for the quarter due to component shortages on about half a dozen of its 8000 parts. At prices for Tesla cars starting at $70,000, the delivery shortfall equates to almost a $100 million gap, which is not minor by any means. In the aftermath of the announcements, Tesla announced the departure of two senior manufacturing and production executives, Greg Reichow, its vice president of production, and vice president of manufacturing, Josh Ensign.
In the wake of major disasters and crises, many supply chain, procurement and finance executives think about things they can do to be better prepared and more resilient before the next big crisis comes their way. As a result, risk assessments, quantifications, and supplier evaluations are often conducted as limited duration, project-based, response-level measures. However, supply chain resiliency is not a limited duration, project-based exercise. It is a strategic long term priority and requires commitment from the very top level of an organization, down to individual contributors with key roles throughout the company.
I have been on a mission for the past two weeks to warn the global business community that the impact on global supply chain operations − from the two massive explosions that occurred on August 12 at the Ruihai International Logistics warehouse in Tianjin, China − will be far worse than suggested by news analysts and Chinese officials.
Business continuity management (BCM)'s scope is perceived largely as internal to company's operations. In today's environment, biggest risks are from raw material suppliers or external partners.
With any supply chain disaster, the rippling effects of factory damage or shut downs can be immediately felt. Take the 2011 Japanese earthquake, as an example. Factories affected by the disaster were shut down, resulting in parts shortages at major suppliers which caused lines down and factory down times at large automotive manufacturers. The impact rippled through the supply chain layers. High tech, automotive, aerospace and other sector companies quickly found out that some of their suppliers were located or dependent on Japanese manufacturing facilities days and weeks after the event. Many supplier dependencies were not identified until much later.
Almost every article about supply chain risk management begins with the complexity and global reach of today’s supply chains. Over the last fifteen years, companies have made some very critical supply chain enhancements – sourcing from low cost countries, outsourcing manufacturing to sub-contractors across the globe, and going lean. I characterize these enhancements as Supply Chain 2.0.
Many supply chain professionals today believe that companies just don’t have the budget for supply chain risk management. I want to put this argument to rest. Almost all companies spend time, money, effort and resources on managing and mitigating supply chain risks. This includes finding alternate sources for their parts. Companies spend millions on inventory optimization and other software to put in place optimum buffer levels to protect their business. People focus a portion of their time developing supplier relationships and executing risk mitigation strategies to protect their business. All of this effort and dollars constitute the supply chain risk management budget. It is rare to find a company out there which ignores all of these activities completely.
The misconception about the budget for SCRM arises from the fact that the budget for these activities typically sits within the normal operating budget. It is usually not explicitly segregated. So the good news is that supply chain risk management is an integral part of every company’s every day operations. The opportunity (not bad news) is that for the most part, risk management activities are mostly ad hoc and are done without a unifying framework or explicitly stated strategy.
Supply chain resources are mostly focused on the here and now problems – my shortage today, that excess I need to disposition to meet my inventory turns target, this quality issue, that ECO and so on. They have very little time to step back and look at risk strategically. This is why they focus on inventory as the most common strategy for risk management. They don’t have the information or analytics readily available to pursue other more effective strategies targeted at the specific exposure.
This lack of time and perceived lack of budget is the opportunity. If resources have very limited time, then supply chain executives need to make sure that their organizations optimize this time to mitigate the right set of risks. The need is to have information and analytics at their fingertips so they can direct their efforts to the right set of risks. The limited time and resources should be used towards executing a mitigation strategy that really addresses the right critical part and the right exposure for that part. Incidentally, critical part/supplier here is not defined in terms of spend but in terms of impact to business of losing its supply! And inventory and second sourcing are not always the right solutions. In fact, inventory can create exposures to other risks like obsolescence, and second sourcing can be expensive and time consuming (more on that to come).
AMR’s 2008 Global Enterprise Application Market Sizing Report supports this assertion that the need for better more deliberate SCRM will cause companies to adopt optimization and simulation tools. Below are additional findings from AMR’s 2007 survey of 89 manufacturing & retail companies on Managing Risk in the Supply Chain (Hillman & Keltz):
“SCRM is an increasingly important initiative for supply chain and operations professionals. 46% of firms plan to implement or evaluate SCRM technology in the next 12 to 24 months. One-third of firms say they have dedicated budget line items for SCRM activities. 54% of firms plan to increase their budgets for SCRM over the next 12 months. Of those firms, the average spending increase will be 17% year over year.”
Bindiya Vakil is the CEO and founder of Resilinc. She will be part of a panel on "Risk Mitigation: Contingency planning and the art of always being prepared" at the upcoming 8th Annual Hi-Tech & Electronics Supply Chain Summit this October 28th, 2014. To hear Bindiya speak, register here.
How Resilient is Your Company's Supply Chain Risk Management Strategy?
Different businesses achieve varying levels of maturity in their practice of supply chain resiliency management. At one end of the spectrum, well defined resiliency considerations are explicitly incorporated into processes and tools--indicating a high level of maturity.
For many companies, building a supply chain risk management program is stymied by the lack of a unifying framework, methodology and toolkit. I will outline what characterizes a world class program and how to go about making supply chain resiliency a reality for your organization.
Risk vs. resiliency – The Big R vs. the Small r. Without formally defining SCRM, supply chain risks are hazards - something that can cause a loss or misfortune. From a supply chain standpoint then, any disruption that can stop the flow of product to customers is a risk because that has the potential to stop the inflow of revenue or greatly reduce profits. Risks are difficult to predict, and certainly it is very difficult to accurately characterize how a particular event might impact the supply chain. For example, back in 2010, not everyone looking at the probability of a volcanic eruption in Iceland would predict that it would cause airspace to shut down all over Europe for days… Government reaction, competitive action, media coverage and public opinion are a few wildcards that can determine how an event will play out.