Looking back on 2010, does it seem that there were an unusually high number of supply chain disruptions? I don’t mean events such as snow and fog closing European airports for a few days—although that certainly disrupted supply chains—but instead, I mean larger, far more encompassing events. The eruption of Iceland’s Eyjafjallajokull volcano, for example, comes to mind.
A recent article that ran on The Wall Street Journal’s website even went so far as to refer to 2010 as the so-called year of the catastrophe. As the article pointed out, there were earthquakes in Haiti, Chile, China and Iran; flooding in Pakistan; forest fires and resulting smoke across much of Russia; a major oil spill off the coast of the U.S.; and of course, the ash cloud resulting from the volcanic eruption.
While natural disasters and extreme weather have always been business challenges, their potential becomes more significant as supply chains grow in complexity. More often than not, supply chains now reach around the world, and consequently, businesses are most likely dependent on suppliers and partners located thousands of miles away. The problem is that these distances introduce a higher degree of risk. Consider, for instance, that automotive manufacturer Nissan Motor was forced to shut down three auto assembly lines in Japan because the factories ran out of tire-pressure sensors when a plane carrying a shipment from a supplier in Ireland was grounded due to the cloud of volcanic ash covering Europe after the volcanic eruption in Iceland.
The impact of such disruptions can be significant. The results of research conducted by Vinod Singhal, professor of operations management at Georgia Tech College of Management, and Kevin Hendricks, associate professor of operations management at the University of Western Ontario, indicates that disruptions do long-lasting damage to companies’ stock prices and profitability. Small businesses in particular are especially vulnerable to the effects of disruptions because they’re focused on fewer products and wield considerably less clout than their larger counterparts. According to Singhal and colleagues’ research, companies experiencing a supply chain disruption suffer a decline in stock prices that ranges between a 33 percent and 40 percent decline compared with industry peers over a three year period.
It’s critical then for companies to conduct risk assessment and mitigation to prepare as well as possible for potential supply chain disruptions. Management should analyze the supply base for example--including their own manufacturing activities as well as their suppliers’. The supply management team must identify poor-performing, higher-risk and redundant suppliers, and transition away from them. This assessment should consider high-risk components throughout the entire supply chain. And of course, companies that rely on numerous suppliers should conduct an assessment based on the value contribution of the components used.
The second step is to identify and assess potential risks to determine which risks have a probable chance of occurring. By proactively identifying, assessing and studying likely events and potential resolutions, it’s possible to mitigate those risks using strategies such as developing plans to source from different suppliers, developing supply sources in other locations (and even other countries) or using alternate modes of transportation.
Finally, as the Wall Street Journal article notes, another way to protect a company from catastrophe risk is to purchase catastrophe insurance. Companies can use traditional insurers and reinsurers, as well as take advantage of coverage from alternative vehicles such as catastrophe funds.
While it’s impossible to foresee and plan for every potential risk, it certainly is worthwhile to plan for likely disruptions as well as those that are possible.