How To Manage Supply Chain Risks

The other day I was reading an article in the Financial Times on how a supplier strike resulted in Toyota shutting down one of its production sites. The article stated that Toyota closed the Tianjin factory after a strike at supplier Toyoda Gosei disrupted production as a result of walkouts by employees discontent about pay.

This article just reminded me that supply chain risks still pose a threat to business operations and ultimately shareholder value. Because of globalization, retailers and manufacturers now have access to cheaper materials, components, sub-components and other products from low-cost countries.

However, this global sourcing poses risks to the business. For example, a major disruption in the supply chain can shut down a company, and have dire consequences on profitability, natural disasters in one geographical area, fire and theft, poor communication of customer requirements, parts shortages and quality problems can also be costly and affect distribution and production.

In managing their supply chains, managers need to look at the supply chain as a whole and ensure there is close collaboration between the various organisations within the supply chain. Collaborating with other supply chain partners adds value to the supply chain, improves customer satisfaction and also reduces waste and inefficiency.

As long as organisations continue to outsource their manufacturing to low-cost destinations such as India, China, Japan or the Eastern Europe, supply chain risks will not cease to exist. In this environment, managers can reduce the impact of supply chain disruptions on their production activities and business profits through:

• Installing improved visibility systems that keep track of all the events within the supply chain. Through such systems, managers are able to quickly identify where disruptions are likely to occur thereby allowing them to plan ahead. Information resources throughout the supply chain need to be linked together, for speed of information exchange and to reduce wasteful paper work. This can be achieved through linking computer networks or sharing information via the internet.

• Developing improved long-term relationships with suppliers to eliminate disruptions in the future. One way of fostering such relationships is via codependency, power balancing, personal ties or target costing which involves rewarding suppliers when targets are reached.

• Having a contingency plan to reduce impact of supply chain disruptions. Once an area of disruption within the supply chain is identified, there should already be in place disruption recovery measures. For example, if one supplier goes down, “Are you in a position to source the materials or sub-components from another supplier?”

• Using more than one supplier. As the old saying goes, “Two are better than one”. By using more than one supplier, you’re cushioning yourself from the dire consequences of depending on one supplier in the event that they go under.

There should be alternative sources of parts. However, in choosing external suppliers, management need to consider the capabilities of the supplier, and the extent to which a close collaboration will be necessary. Also there is need to consider the location of that supplier for cost and tax issues.

• Establishing a greater understanding of external factors affecting the supply chain through conducting a detailed analysis of past supply chain disruptions and identifying the causes. This will help surface weaknesses in current supply chain design, or product sourcing decisions that increase supply chain risk exposure.

Having improved knowledge of where risks lie within the supply chain and how to respond is key to effective and efficient supply chain management.

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1 Comment

  1. Great article very important information i found here!

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