Last week, I was fortunate enough to speak at the Evergreen Packaging Carrier Conference – a world class event with great people, I might add. One of the topics we talked about was risk management and scenario planning. I endeavored to make the point that all too often risk management was overly focused on legal or compliance scenarios. How do I ensure we don’t get sued? How do I make sure we are compliant? These are very important questions, but the definition for risk management is much broader. I like the way APICS approaches the definition:
“In the context of supply chain management, risk management involves dealing with uncertainty in supply, transformations, delivery, and customer demand. The uncertainties can be the result of such forces as yields, timing, pricing, and catastrophic events.”
In our view, risk management should focus on holistic challenges that could disrupt the supply chain. Since the 1970s, Shell, a global group of energy and petrochemicals companies, has been developing scenarios to explore the future. Overall, these scenarios provide a view of what the future world could look like to help leaders of business, governments and academia to make better business decisions and develop risk management strategies. Some might think this seems impractical. Why would you plan for something that may never come to be?
Superstorm Sandy, that’s why. Maybe you are saying, “That is only a storm that comes along every 100 years. How can I plan for that?” You aren’t wrong, but here is another list of recent events to think about:
· Thailand Tsunami (December 2004)
· Hurricane Katrina (August 2005)
· Chicago Blizzard (Feb 2011)
· Japan Earthquake and Tsunami (March 2011)
· European Financial Debt Crisis (ongoing)
· The East Coast Port Strike (ongoing)
The fact is catastrophes occur. In my talk at the Evergreen Carrier Conference, I polled the carriers asking, “How many of your customers involve you in contingency planning or supply chain risk planning discussions?” The overwhelming majority said they were not involved in these discussions. While I am willing to bet that many shippers are developing proper contingency plans, I don’t believe it is a standard practice in the industry yet. However, my instincts are that if you have been burned by a supply chain disruption, you’ve probably adopted more robust practices.
So, what is the right balance between profitability and resiliency?
The Lean supply chain teaches reduce inventory, minimize suppliers, and ensure on time. The Resilient supply chain teaches redundancy of manufacturing lines, inventory, and capacity. I would argue neither in isolation is correct and each shipper should find the right balance between profitability and resiliency.
I’ll leave you with a story the Wall Street Journal ran December 13, 2011: Intel Cuts Its Outlook, Giant Blames Thai Flood for $1 Billion Drop in Sales Goal.
The article mentions that Intel claimed months of heavy rains in Thailand have dismantled a large chunk of the world’s hard-drive manufacturing operations. Now, I obviously do not work for Intel nor do I have much knowledge about their business. This is pure speculation. Having said that, do you think they performed any supply chain scenario planning with relation to this part of their supply chain? Think about it. If they had performed a failure modes analysis, would they have identified an over dependency on a single geography? Maybe they had other choices. Maybe, they didn’t. Maybe with proper scenario planning, they would only have lost $250 million instead of $1 billion. We’ll never know.
My point is this. Look at your own supply chain. Have you done any scenario planning? Is your supply chain resilient? I am willing to bet some of the people in last week’s conference probably didn’t’ think too much about it. I can’t’ say that I blame them. It seems lots of people haven’t. Having said, how many shippers are now taking greater stock in this best practice today, given Superstorm Sandy’s grim reminder?
This post was originally published on Logistics Viewpoints on November 15, 2012.