Why You Need to Understand Your Company's Supply Chain Risks - Insurance Thought Leadership

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November 1, 2011

Why You Need to Understand Your Company's Supply Chain Risks

Summary:

Most businesses aren’t prepared for the impacts of a supply chain interruption. If you are a car, airline or electronics manufacturer, and key component parts are made in Japan, you may be finding that out the hard way. If you can’t get the parts, you can’t complete your product, and you can’t support your customers. Can your competitors?

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Supply chain failure is the most common failure in a company's operations. In a disaster, managing your supply chain is the key to competing successfully. Do you know what your risks are?

This is Part 1 of a two-part series on supply chain risks. Part 2 can be found here.

Most businesses aren't prepared for the impacts of a supply chain interruption. If you are a car, airline or electronics manufacturer, and key component parts are made in Japan, you may be finding that out the hard way. If you can't get the parts, you can't complete your product, and you can't support your customers. Can your competitors?

Today, companies worldwide are struggling with supply chain issues following the Japan disaster, and that is only the most recent example. Last year, a volcanic eruption in Iceland paralyzed air transport, not just for people, but also for high value or urgent goods and freight. In the aftermath of Katrina, manufacturers nationwide suffered financially because of their inability to obtain necessary supplies, because ships were unable to enter Gulf ports for an extended period.

How Your Supply Chain Vulnerability Has Increased
We live in a world of “just in time” delivery and minimal inventory supply. Over the last 10 years, average cycle times (raw materials of suppliers to finished product) have increased from less than 45 days to more than 120 days in global supply chains, while total inventory across the supply chain has gone from 42 days of supply to less than 39. The “time to impact” of a disruption in your operations now occurs in one-third the time.

Business environments are more challenging, with increasing business and operating risks, growing demand and supply uncertainties, new supplier and outsourcing alternatives, more demanding and diverse customers, globally interdependent operations, and continuing cost pressures. As a result, companies face critical supply chain decisions.

Unfortunately, most supply chains were incrementally built over many years, under very different economic and business conditions. Still, we see that executives are approaching supply chain and investment decisions with dated, variable-cost based tools and thinking. The problem is that today's supply chain world is very different:

  • Cost drivers are more varied;
  • Customer service requirements are much greater;
  • Sales demand is more uncertain;
  • Supply chain networks are subject to dramatically higher risks.

The operating complexity, customer demands and global reach of many supply chains vastly exceed the ability of current frameworks to address key design decisions. As complexities continue to grow, and the decisions become more difficult, the historic tools, principals and decision frameworks increasingly give wrong answers — or no answer at all.

Firestorm Solution's supply chain risk survey results revealed that less than 20% of businesses have:

  1. analyzed the threats their supply chain presents;
  2. looked at their suppliers' plans; and
  3. understand how those plans will impact them in the wake of a disruption or disaster.
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