Accenture Academy Blog
There’s an old adage that says “art is hard to define, but I know it when I see it.” Supply chain executives can relate to that feeling. Their analogy is:  “I don’t have a formal definition of a disruption, but I know when I’ve experienced one!”

Supply chain disruptions are common and costly. Just look at the supply chain havoc created by multiple snow storms over the last two weeks in unusual locations like Washington, DC. A 2008 study by Aberdeen Group revealed that 99 percent of the companies surveyed had suffered a supply chain disruption in the past year, with 58 percent suffering financial losses.

Supply chain professionals must take an aggressive approach toward these costly disruptions. The keys to success include:  understanding the concept, recognizing the types of supply interruptions, and proactively managing these potential supply chain headaches.

Defining Supply Chain Disruptions

Peruse the dictionary and you will find numerous disruption definitions. Entries range from mild:  “an act of delaying or interrupting continuity” to severe:  “to throw into confusion or disorder” and “to break, burst, or rupture.” Without question, these definitions are neither positive nor pleasant.

Supply chain disruption definitions reflect these precarious undertones. “Supply chain disruptions are unplanned and unanticipated events that disrupt the normal flow of goods and materials within a supply chain,” says Rob Handfield, Bank of America Distinguished Professor of Supply Chain Management at North Carolina State University. “As a consequence, disruptions expose firms within the supply chain to operational and financial risks.”

Interruption Types

Supply chain managers must deal with many different disruptions. Many are outlined in an Accenture report on supply chain risk and uncertainty.

  • Severity: Short-term nuisances like truck breakdowns and dock congestion have minimal impact. In contrast, serious disruptions can cause multi-day or -week interruptions or debilitate product availability for months.
  • Sources: the origins of supply chain disruptions are many—suppliers, service providers, internal errors, and more. Transportation is a primary cause of these headaches. Accidents, breakdowns, and congestion are basic challenges. With the recent spate of carriers going out of business or taking equipment out of the system, capacity has the potential to be a major disruption issue when the economy rebounds.
  • Controllability: with proper oversight, we can manage known and predictable problems. But there are issues that we can’t control like the recent weather events. Snow, hurricanes, and other Mother Nature events can quickly interrupt flows.
Companies must understand these different types of disruptions and prepare for them in advance. Getting overwhelmed and waving the white flag in surrender only facilitates poor response, high cost, and slow recovery.

Appropriate Responses

Self-inflicted disruptions—over-reliance on capacity constrained service providers and sole sourcing—can be alleviated via an avoidance strategy. It requires that companies evaluate potential risks before implementing new supply chain processes. If the potential peril is great, modify the proposed process.

The push to source produce globally is a prime example. Importers must understand that global supply lines are more brittle and problem prone.

“Shifting demand from local sources to overseas suppliers provides unit price economies,” notes Donavon Favre, a North Carolina State University SCM faculty member and former Accenture executive. “However, companies don’t fully understand the communication challenges and lead time requirements of lengthy supply chains. To get the right products at the right time, forecasts have to be almost perfect.”

Sole sourcing is another inherently risky strategy. Favre recommends that companies validate suppliers’ risk mitigation plans and capabilities. “Sole sourcing can work if the supplier has multiple locations with the capacity to serve your needs,” he notes. “This protects you against individual location disruptions while reaping the benefits of the supplier’s consistent processes across multiple locations.”

Additional strategies help avoid product availability disruptions:

  • Streamlining supply chain networks and shortening supply chains when possible
  • Reallocating inventory based on demand signals as it gets closer to the market
  • Cultivating back-up supplier relationships to handle supply disruptions
Other breakdowns result from unavoidable, one-time events. Weather, labor strife, and quality problems are potential nightmares. In these situations, you must mitigate the duration and impact of supply disruptions. This is accomplished through investment in three capabilities:

  • Improved visibility to key supply chain nodes that can quickly detect disruptions
  • Well-positioned resources that enable quick short-term recovery plans
  • Long-term collaborative approaches to eliminate reoccurrence
Effective risk mitigation also requires advanced preparation.

“Companies need to create continuity plans for potentially high-impact, high-frequency disruptions,” states Chris Norek, founding partner of Chain Connectors. “Detailed processes promote timely, accurate response.”

Continuity planning begins with a brainstorming session by the supply chain team to identify potential disruptions. Action plans must be developed for high probability risks. This sequential process outlines what to do in the event of the disruption, identifies who has primary control for the situation (as well as a back-up person), provides a detailed responsibility matrix, and specifies the chain of communication. The plans should be periodically stress-tested.

“Most people don’t perform well under stress,” adds Norek. “Without a plan in place, the tendency is to throw all your resources at a problem. Meanwhile, you’re not serving other customers well. But if you give people a well-documented step-by-step process to follow, pressure is reduced and effective decisions will be made.”
 
Summary

Remember, the key issue regarding supply chain disruptions is “when” rather than “if.” Despite your best preventative measures, disruptions will happen. Your advanced preparations and response strategies will determine whether the financial impact and customer service fallout are minimal or severe.
 

Comments:
  1. Change of legislation risk
    By Gustavo Pisani Gustavo Pisani on Thursday, March 11, 2010 at 10:24 AM
    Kind of risk which is becoming more probable under new socio political circumstances on certain developing countries with a severe impact on the Supply Chain. Not to be classified as a geopolitical instability due to a pseudo constitutional establishment where power independence is disguised. It’s a new volatile legal landscape, which ultimately may trigger all of the common supply chain risks because creates conditions for them to prevail. It’s a potential sudden death scenario that may require a whole new set of skills of risk management. Invite the audience to take a look around and identify potential hosts of this new reality.
  2. Managing Risks
    By Brian Gibson Brian Gibson on Tuesday, June 1, 2010 at 9:09 AM
    Gustavo brings us great points and a call for information. What are your challenges - legislative and otherwise? What is your company doing to develop more effective risk management capabilities? Is there a need for more risk management training? Let us know!