Risky business

p>Disclaimer: This is not about Tom Cruise jumping about in his small clothes, as in the movie "Risky Business." Rather, it's about a topic we wrote about in this space a few years back: supply chain resilience. The foundation was built from concepts outlined by Yossi Sheffi of the Massachusetts Institute of Technology in his book The Resilient Enterprise (coincidentally published in the wake of Hurricane Katrina). At the time, the idea hit home, and there was a flurry of activity around planning for operational continuity in the event of unlikely disasters.

But we're not hearing as much about risk management these days. Maybe we made good plans but abandoned them when they were not immediately needed to respond to a crisis. Perhaps we believed that bad things couldn't happen to us. Yet that kind of thinking flies in the face of reality.

It's not just the staggering, widespread, and continuing consequences of the nuclear accident and tsunami in Japan. We've had another volcano in Iceland, earthquakes in New Zealand, tornados in the United States, and so on and so on. Not to mention the Gulf of Mexico's spectacular deep-water oil spill, the BP saga. Oh, wait, then there are the 2011 rains and flooding that shut down water transport on the Mississippi River.

All of these seem to have had supply chain consequences that hadn't been contemplated, that hadn't been addressed by having relevant contingency plans in place. For example, supply chain managers and their manufacturing peers were shaken to the core when the twin disasters of earthquake and tsunami, exacerbated by nuclear uncertainty, shut down the flow of critical parts and materials from Japan in early 2011.

Worth reading and heeding
We're not going to recap the content of Sheffi's The Resilient Enterprise. But it really is worth reading and heeding. In sum, it powerfully demonstrates the value of recognizing that there are so very many unlikely disasters facing every company that it is prudent—and should be mandatory—to proceed as if at least one of the unlikely cases will occur.

As for what's involved in supply chain risk management—and what should be—we recommend an approach similar to what Dr. Sheffi has prescribed. It's hard work, it's resource-intensive, it requires devious minds to imagine the unimaginable, and it demands both disciplined and creative thinking in preparing contingencies, workarounds, alternatives, and substitutes.

But the time spent on tasks like identifying backup sources of supply or alternative distribution nodes could pay off in spades in the event of disaster. We could write a series of mini-cases to illustrate how real-world companies have benefited from contingency planning, but we'd need much of the current issue's space to do that. Suffice it to suggest that the pharmaceutical company sitting atop the San Andreas Fault benefited from setting up alternative distribution 2,000 miles away. And an East Coast technology distributor did itself a lot of good with a California DC that could fill orders long after the shop had closed in New Jersey. In another example, a major retail chain in Ohio developed a second campus just five miles from the first as a hedge against natural disaster wiping out either one.

The bullet points below illustrate some of the things that leading supply chain managers do to proactively address risks associated with suppliers, customers, and operations:

Suppliers

• Ensure that every supplier has contingency plans in place to deal with business interruptions of their own.
• Identify substitute or alternative suppliers for all products and materials.
• Focus early on alternative sources when a single-source supplier has been selected for whatever reason.
• Evaluate the pros and cons of hedging and speculative inventory investment when volatile commodities are in play.
• Focus early on alternatives when single or limited sources are located in geographies subject to natural disaster, civil unrest, or military action by foes.
• Track supplier financial stability on an ongoing basis.
• Create joint ventures in situation that could strain supplier finances.
• Consider loans/investments for suppliers in temporary financial difficulty.
• Fund raw materials purchases for small suppliers trying to fulfill unusually large orders.

Customers

• Draft corporate policies regarding how much business any one customer can command.
• Limit the amount of capacity that will be devoted to top tier customers.
• Track key customers' financial stability on an ongoing basis.
• Monitor/manage customer accounts receivable.
• Evaluate the mutual benefit of joint ventures with selected customers.
• Consider the pros and cons of greater vertical integration with key customers.

Operations

• Manage inventory holdings carefully, carrying sufficient stock to maintain high service levels yet avoiding overbuilding. Consider using postponement whenever practical.
• Arrange with peers (or even competitors) for overflow storage space availability.
• Invest in one or more distribution centers that can take the heat off a disaster at headquarters.
• Build a DC network that can support order fulfillment to a single customer from any one of the facilities.
• Stay abreast of industrial space markets against future long-term or temporary needs.
• Build extra manufacturing capacity into multiple plant sites to allow for shifts in production.
• Design plants consistently for ease of handling volume/product shifts.
• Pre-arrange backup from third parties to backstop/augment fleet operations.
• Maintain carrier portfolios that permit shifting volumes from one to another (without carrying excess candidates and diluting volume economies).
• Be "easy to do business with" in dealings with suppliers, customers, service providers (without being a patsy).

Bottom line
In short, be prepared, be proactive, be fair. You will have gone a long way toward blunting the consequences of the myriad events that can interrupt the flow of goods from your suppliers, through you, to your customers.

But don't stop there. Buy time with these interim tactical moves to seriously prepare for "The Big One," as they say in California. Unfortunately, The Big One is not confined to California. We'll all have Big Ones to face sooner or later.