Managing Supply Chain Risks

One key takeaway you will have from any operations strategy class is that success will come to organizations that can find ways of optimizing the numerous variabilities in their supply chains and smoothening things out as much as possible. In other words, there is a high, negative correlation between the number of variables (raw material and finished goods type, mix, volume, sourcing, pricing, distribution, etc.) that define an organization’s supply chain and the resulting operational costs and efficiencies. Although the variety in resources and inventory gives companies flexibility and competitive advantages, it also takes away a larger chunk of the firm’s ever precious capital and more importantly, adds significant risks when one or more of the supply chain links fail.  

The Icelandic volcano eruption, the Gulf of Mexico’s BP oil spill, and “Oceans 13” style Prozac and Cymbalta (Eli Lily Pharmaceuticals) drug heist are all compelling examples of events that can throw a well established supply chain into disarray and disrupt the normal flow of resources. The volcano event left the airlines scrambling for basic supplies needed to host the stranded passengers. It left the Dutch flower growers wondering how they would get their delicate Tulip orders across to their overseas customers. The BP oil spill is resulting in the disruption of crude oil supply to its Texas and Louisiana refineries, which in turn will start disrupting oil/gas supplies to end customers like factories and gas pumps. The Eli Lily drug theft caused the company to look into alternate means for sourcing and replacing the drug supplies to the impacted distributors and pharmacies.  

Needless to say, the global flavor of business operations and financial markets has provided new opportunities and threats (i.e. challenges) to firms. Firms have already been weighing into their cost of doing operations, factors like political volatility, bureaucratic hurdles, regulatory requirements, and cost of capital. But the recent events, some which I have outlined in this posting, are really asking global firms to broaden their imagination and step up their game when it comes to managing risks across their supply chain. There are a myriad of sophisticated technologies available out there for companies to tap into when it comes to identifying, sizing, and monitoring events that put their supply chain elements at risk. But it all needs to start from the top, with the management team acknowledging that a certain risk is relevant to their business.  

Did the airlines or the flower growers consider volcanoes as a risk? Did BP execs believe that they had adequate controls and tools in place to manage a typical oil spill? Did Eli Lily believe that their distribution network was adequately sound and secure? Supply chain risks are introduced by suppliers, intermediaries, resellers, distributors, and even customers (think of product returns), and the more of these that you have in the mix, the more it is going to cost you to manage the risks. You can either be prudent and make the necessary investments and adjustments upfront, or be naïve and foolish and wait for a volcano to erupt and then react to it. As always, you have choices but it’s up to you to rationalize and prioritize them. Stakes are high and you would rather be safe than sorry. 

As always, I welcome your rants and raves on my thoughts.