Learn how leading companies go beyond cost-cutting to ensure continuing profitability.
For a moment last fall, a supply chain mishap threatened to spark a United States public-health disaster of gigantic proportions. Contamination at an overseas supplier held up 48 million flu shots half of the nation's expected supply and speculation briefly ran rampant. Would the flu season be as bad as last year's? How many people would get sick? How many would die? Would this alter the outcome of the presidential election? Because the media ended up primarily focusing on the political story which never came to pass it nearly lost the basic management lesson: When it comes to impacts on the market, your suppliers' missteps can be as dangerous as your own. Indeed, the story highlights a question many businesspeople should be asking: Isn't it time to pay attention to risk management in the supply chain?
For over a decade, companies have been gaining huge cost savings by streamlining their supply chains. While successful, and thus worthwhile, these trends have also exposed organizations to new sets of risk. Some rely too heavily on a too-small set of suppliers, as in the U.S. flu-vaccine case. (Great Britain, relying on the contaminated supplier for just 10 percent of its supply, faced no shortages.) Many, in finding global suppliers, have also found global risk sources: political instability, terror and other security threats, and shipping disturbances. Most, in reducing their inventories, have increased the potential negative effects of even the tiniest supply interruptions.
Risk management is nothing new, of course. Smart companies have always defined, prioritized, mitigated and audited all sorts of risks. As the supply chain has evolved new philosophies, procedures and relationship structures have evolved as well along with new risks. We might well ask: What is the best way to manage supply chain risk? How do leading companies approach this task? How do they differentiate it from other risk management functions?
The Impact of Supply Risks
March, 2000: A lightning bolt struck a power line in New Mexico, causing power fluctuations throughout the state. The strike also caused a fire in a production room at a Philips Electronics semiconductor manufacturing plant. It was a small fire easily put out by employees. But it stranded eight trays of valuable silicon wafers in a furnace, where they were ruined. It also set off sprinklers throughout the plant, causing water damage, and allowed smoke to infiltrate a sterile room and contaminate millions of silicon chips. The factory initially figured it would lose a week of production, but in fact it lost months.
The radio-frequency chips were a component in mobile phones, part of the supply chain of both Nokia and Ericsson, the Scandinavian phone companies. Within days, Nokia deployed a team of 30 officials to get more information, redesign chips, fast-track a production-boosting project, and pressure Philips and its other chip suppliers to make up the difference. Ericsson, dependent on the same chips for the same product, hadn't yet thought about its supply chain beyond the imperative to cut costs. In the mid-1990s it had simplified its supply lines by eliminating backup suppliers for many parts. With no other supplier and no detailed risk management plan (We did not have a Plan B, one executive told the Wall Street Journal), Ericsson missed out on months of production during a critical market period. Ericsson's losses totaled US$400 million; when they were announced its stock fell 14 percent in a few hours. Although Ericsson now has a proactive supply chain risk management approach, it has also withdrawn completely from the mobile phone handset production business. (Almar Latour, Trial by Fire: A Blaze in Albuquerque Sets Off Major Crisis for Cell-Phone Giants, Wall Street Journal, January 29, 2001. Also Andreas Norrman & Ulf Jansson, Ericsson's proactive supply chain risk management approach after a serious sub-supplier accident, International Journal of Physical Distribution and Logistics Management, Vol. 34 No. 5, 2004.)