IT'S BEEN SAID you can never be too rich or too thin. The "too thin" part isn't really true about people and it definitely isn't true about supply chains.
As several observers have pointed out recently, it is possible for supply chains to be too lean and if the truth be told, today many of them probably are.
"We've worshipped so much at the altar of lean that for most companies there's no Plan B anymore," says Jeff Karrenbauer, president of Insight Inc., Manassas, VA, which helps companies audit their supply chains. "It's very hard to come up with Plan B in this environment, because having a Plan B implies some level of redundancy.
But we've been so busy cutting every shred of excess that many corporations are now down to the bone."
When does the pursuit of supply chain efficiency become a kind of business anorexia?
When an enterprise loses its resilience.
Resilience is defined as the ability to recover or bounce back from any kind of negative event.
In a recent article on managing supply chain risk, Russ Beverly and Jade Rodysill, senior managers with Accenture's North American Supply Chain Group, advise companies of the need for operational resiliency. "Ongoing business resilience," they say, will become a requirement for high-performance companies, who will be judged as much on their ability to assure future earnings through proactive risk mitigation and management, as they are currently measured on earnings per share.
Why the focus on risk now? The nightly news no doubt plays a role. From the still lingering after-effects of Hurricane Katrina, to the almost daily parade of headlines announcing another huge product recall, to the tragic collapse of the I-35 bridge in Minneapolis, stories of risks not well-dealt-with have been mustering attention.
But it's not just a matter of focus. The risks that most businesses face are growing.
As Beverly, Rodysill and Karrenbauer all point out, today's extended, globalized supply chains expose companies to--more and new kinds--of risk than ever before.
"Worldwide supply chains are inherently more risky because they involve multiple countries with multiple border crossings, multiple currencies and multiple regulatory agencies in each country, not to mention the additional costs inherent in stretching business processes across extended geographies," Karrenbauer points out.
At the same time, faster business cycles afford shorter windows for reaction and recovery.
In this environment, it's crucial for companies to properly assess and take steps to insure against the whole gamut of risks that potentially threaten their supply chains.
From acute threats like natural disasters, terrorist attack, or infrastructure collapse, to the chronic risks that attend any logistics enterprise-forecast error, interruptions in inventory flow, or rising fuel costs, to name a few--all are potential negative occurrences that can be anticipated and planned for.
Aside from the fact that it is simply prudent to be aware of and prepared for any kind of risk, chronic or acute, that could threaten your business, experts say there is considerable likelihood that financial and regulatory pressures may soon force companies to pay more attention to the issue as well.
Sarbanes-Oxley regulations, if they arebroadly interpreted, could very well be interpreted to require that companies outline and quantify various risk exposures as a part of their financial reporting responsibilities, Karrenbauer conjectures.
The recent spate of tainted product recalls may also become the catalyst that leads to new legislation regulating "track and traceability" of product from start to finish through the supply chain. Or the simple risk of litigation could propel more companies to tightening their controls.
Whatever the impetus is, companies need to take real action to assure themselves and their shareholders that they are insuring themselves against supply chain failure and not just financially.
Most IT professionals can whip out handsomely bound, comprehensive and detailed plans for back-up and recovery in case of disaster, but supply chain executives typically are not similarly equipped, Karrenbauer notes. Yet their operations are at least as subject to risk.
A study of risk management by Accenture underscores the lopsided equation between risk and preparedness in the supply chain. According to the research, 73 percent of U.S. companies it surveyed had experienced a supply chain disruption in the past five years and half of supply chain managers said they expect risks to their companies to increase over the next three years.
Yet only 17 percent of these executives said their companies understand and manage supply chain risk adequately.
"I know of companies that have effectively war-gamed the loss of every facility they have around the world, so that when something happens they can pull out the associated plan and immediately see what steps to take-beef up capacity here, outsource there, shift volume to an alternative DC," Karrenbauer observes. "But based on my experience, I'd say fewer than 5 percent of companies are doing this."
Whether facing a port closure due to terrorist attack, a load delayed by weather, or a supplier with production problems, the essential component of successful mitigation and recovery when risks materialize is advanced planning, Karrenbauer stresses.
Some companies have formed disaster-response committees and formalized telephone chains to notify the appropriate resources when things go wrong. This response, however, "still boils down to bringing a bunch of people together in a conference room post-incident to discuss, ‘What do we do now?' he notes. "It's still just an ad hoc response after an event. That's not really planning."
You Have To See It Coming
Describing business resiliency Beverly and Rodysill say, "Instead of reactive notification and awareness of disruptions, a resilient supply chain would enable early detection through a 24/7 monitoring and alerting capability."
As several others put it, the key to risk preparedness is visibility.
"Lack of visibility into one's supply chain is a key risk in itself," points out Suresh Bharadwaj, senior principal with the Retail and CPG unit at Infosys Technologies Ltd., Fremont, CA. "A lot is riding on the visibility you have."
Visibility into data and processes affects both an enterprise's capabilities to envision, detect and plan for potential risks and to act effectively once a threat has been identified.
Understanding the importance of accurate risk assessment and preparedness and developing comprehensive, specific plans to prevent, mitigate, and recover from the full range of potential risks, are among the most important jobs of any firm's human capital.
Good information technology can provide powerful assistance in these tasks. It helps managers quantify and prioritize potential risks, detect impending disruptions and respond effectively to minimize negative impacts and recover from them.
One handy form of early warning radar to help companies detect impending risks are performance measurement systems with dashboard interfaces that alert users whenever key performance indicators fall outside defined parameters. Many enterprise and supply chain management suites now come with this feature.
Once situations are recognized, event management systems, which may be built into enterprise software packages or integrated with them, are designed to notify impacted parties of challenge situations and monitor the response and resolution.
Both performance measurement and event management systems provide tools for notifying responsible parties by email, voicemail, or other processes, when indicators require their attention. They may allow supervisors to monitor every other resource that was notified and keep tabs on whatever actions are taken by other associates to remedy the situation, in real time.
Or, systems can be set up to notify one resource and if no action is taken within an allotted time, to cascade the notification up through the organization until proper action has been taken.
Taking advantage of such capabilities to help in assessing and managing risk in the supply chain is a matter of devoting human resources to the tasks of analysis and process development.
"My suggestion is to utilize the level of granularity that your software provides and build proper processes on the back side so that automatic notifications go out, via email or other communications technology when something occurs, so all the proper people do get notified," says Tom Kozenski, vice president of product development for RedPrairie Corp., a Milwaukee, WI-based software company that offers solutions from retail store operations up the supply chain to manufacturing.
"You have to take the time to set up the processes, both in and outside the software, so the right people are notified and nothing falls through the cracks.
"A second point is that someone must be charged with keeping the data accurate and current. What if you're automatically sending email notifications to someone who doesn't work at a company anymore? That would turn into an item for the post mortem after a disaster, when you ask, how could that have happened?"
From another angle, the real-time capture of information about product and materials as they flow through the supply chain also enhances visibility throughout a company's operations. Whether through RFID technology, barcode scanning and radio frequency communications, or any other sensing and identification technology that can be applied, ready access to granular, real-time data improves companies' ability to detect specific disruptions or disruptive influences closer to the source and assists in organizing and executing a timely response.
"Of the many types and sources of risk in the supply chain, from shortages of supply that prevent your being able to deliver products to customers; to the risk of counterfeit sources of supply, or inferior quality ingredients making their way into your products, one means of mitigating risk lies in the intelligence going into the design of your supply chain network," comments Warren Sumner, vice president, marketing and products for Clear Orbit, Austin, TX. "For example, making sure you have back-up sources."
In terms of visibility, he adds, "We focus on providing instantaneous real time information on the status of all materials, whether raw materials or finished goods or work in progress, moving from supplier partners through the manufacturing facilities, into the supply chain and out to customers."
ClearOrbit provides barcode labels, RFID and software that integrates its technology with large ERP systems like Oracle and SAP, to provide users with extended visibility and control internally, as well as upstream into their suppliers' operations and downstream into their customers.
"The more real-time visibility you have into all your materials in their various stages of completion and transport, the better you are able to react to a disruption, a supply problem, or any other kind of risk, and to deal with changes or problems."