Ever since the 2011 Japanese tsunami shut down much of Toyota’s parts and manufacturing capabilities, logistics managers have been looking more closely at the vulnerabilities in their own supply chains and searching for ways they can quickly rebound from both large and small disruptions to them.
It begins with assessing potential risks—economic, political, environmental and social. This can include everything from natural disasters, political upheavals and labor unrest to environmental factors (water shortages), compliance issues (conflict minerals) and cybersecurity. There are reputational risks—companies might have to find different suppliers if news reports uncover poor working conditions at factories—and financial risks if second or third-tier suppliers suddenly cease operations because of cash flow problems.
But there’s another step in the process—risk quantification. “This is much more complex because you have to take a holistic, scientific approach that assigns probabilities to all of the potential disruptors with knowledge of the assets and the criticality of those assets,” said David Shillingford, senior vice president, supply chain solutions at Verisk. “It’s very difficult to do, but it is transformational because it allows you to put a dollar figure against risks.”
Identifying assets (suppliers) isn’t easy. “Supply chains are messy, complicated things with suppliers all over the world, and all these moving parts,” said Bruce Arntzen, executive director of MIT’s supply chain management program. “There are people who work in the supply chain function who still don’t understand what they are getting from where.” Companies haven’t done a good job of capturing this information in their enterprise resource systems.
By Mary Lou Jay