Supply chain volatility and risk have always existed in business. Most organizations, however, treated them as operational outliers—something to be dealt with on a periodic basis using a contingency-plan approach. Essentially, volatility and risk were viewed and managed as discrete ‘one-off’ incidents separated by periods of down time and recovery.
However, the events of the last few years changed that sentiment, at least within the world of supply chain management. Companies and countries were blindsided by chaos resulting from corporate and financial system meltdowns, the housing market collapse, political upheaval, natural disasters, fuel crises, wars, global recession/depression, massive market realignments and more. As a result, the amplitude and frequency of volatility escalated radically, affecting nearly every phase of the supply chain.
In the aftermath of this upheaval, business has entered a new era in which volatility is a systemic condition, rapid oscillation is a business constant, and recovery down time is an outmoded concept. Traditional supply chain management models broke down or, at best, bent under the strain of the unknown and the unexpected.
As a result, the business world has realized that supply chain strategy and practice must evolve. In doing so, many companies are adopting a new style of “extreme supply chain management”; defined in the 2010 book X-SCM: The New Science of X-treme Supply Chain management as the science of governing global supply chains experiencing instabilities of unprecedented amplitude, frequency and duration.
“Extreme supply chain management” tackles the conditions of systemic volatility, continuous oscillation, and few or no-rest recovery periods. It recognizes the need for collective, rather than sequential, risk management and facilitates collaboration on a new scale that is necessary for survival. It challenges companies to be “perpetually vigilant,” and to develop sense-and-respond supply chains that constantly scan their networks using business intelligence systems and exception reporting to detect anomalies that exceed tolerances. Essentially, these systems allow companies to control their multidimensional supply chains effectively in “predictable” times, but, more importantly, in times of extreme change.
Today, many companies are employing these techniques to get a control on the volatile conditions that have been created by global upheaval. IBM recently connected with more than 300 of these companies—including executives from a number of manufacturers, distributors and third party logistics providers—to inquire about the most prevalent issues in managing volatility today, ask how these companies and executives are going about addressing those issues and look at some best practices from companies that have had success.
When asked what their primary source of volatility and risk is, the two top responses were customer risk (46 percent) and demand or channel volatility (41 percent). To manage this volatility and risk, the top three priorities were:
- Reduce order cycle times to customers (56 percent)
- Manage volatile demand (54 percent)
- Increase supply chain visibility and resiliency (55 percent)
In talking with these executives, it became clear that firms struggle not only to manage business uncertainty but to get out ahead of it, and that they are re-thinking all aspects of their supply chains to do so. Some of the strategies that we saw them pursuing include revising their demand and production planning process, reworking their inventory practices, updating their supply chain partner relationships, revamping their network design and asset strategies, changing information strategies and capabilities, and reworking their cost structures.