A Supply Chain View of the Resilient Enterprise

An organization’s ability to recover from disruption quickly can be improved by building redundancy and flexibility into its supply chain. While investing in redundancy represents a pure cost increase, investing in flexibility yields many additional benefits for day-to-day operations.

After the September 11, 2001, terrorist attacks, the U.S. government closed the country’s borders and shut down all incoming and outgoing flights. The impact on many supply lines was immediate. Ford Motor Co. had to idle several assembly lines intermittently as trucks loaded with components were delayed coming in from Canada and Mexico. Ford’s fourth-quarter output in 2001 was down 13% compared with its production plan.1 And Toyota Motors Corp., also adhering to just-in-time inventory discipline, came within hours of halting production at its plant in Indiana as it held out for assemblies from a key supplier awaiting steering sensors that usually came by air from Germany.2

Managers experience risk on many levels, but its primary source is uncertainty in the demand for products — uncertainty that has increased dramatically in recent years due to several interdependent trends such as increased customer expectations, more global competition, longer and more complex supply chains and greater product variety with shorter product life cycles. In addition, managers still must cope with the conventional disruptions of supply variability, capacity constraints, parts quality problems and manufacturing yields. Now, on top of all that, they have to cope with the ongoing unease resulting from the war on terror and the likelihood of further attacks following the March 11, 2004, train bombings in Madrid and the two July 2005 bombings of London’s transportation system.

The problem is that many companies leave risk management and business continuity to security professionals, business continuity planners or insurance professionals. However, building a resilient enterprise should be a strategic initiative that changes the way a company operates and that increases its competitiveness. Reducing vulnerability means reducing the likelihood of a disruption and increasing resilience — the ability to bounce back from a disruption. Resilience, in turn, can be achieved by either creating redundancy or increasing flexibility. While some redundancy is part of every resiliency strategy, it represents sheer cost with limited benefit unless it is needed due to a disruption. Flexibility, on the other hand, can create a competitive advantage in day-to-day operations. Investments in flexibility thus can be justified on the basis of normal business results without even taking into account the benefits of risk mitigation and cost avoidance. (See “About the Research.&

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References

1.“Material Handling in Troubled Times: Will Logistics Save the Day?” December 2002, http://www.mhmonline.com.

2.G. Ip, “As Security Worries Intensify, Companies See Efficiencies Erode,” Wall Street Journal, Sept. 24, 2001, p. A1.

3.F.E. Bird, G.L. Germain and F.E. Bird Jr., “Practical Loss Control Leadership,” rev. ed. (Loganville, Georgia: Det Norske Veritas, 1996); and J.R. Phimister, U. Oktem, P.R. Kleindorfer and H. Kunreuther, “Near-Miss Incident Management in the Chemical Process Industry,” Risk Analysis 23, no. 3 (2003): 445–459.

4.Y. Sheffi, “Supply Chain Management Under the Threat of International Terrorism,” International Journal of Logistics Management 12, no. 2 (2001): 1–11.

5.The case is described in detail in T. Nishiguchi and A. Beaudet, “The Toyota Group and the Aisin Fire,” Sloan Management Review 40, no. 1 (fall 1998): 49–59.

6.B. Bremner and C. Dawson, “Can Anything Stop Toyota?” Business Week, Nov. 17, 2003, 18.

7.W.C. Jordan and S.C. Graves, “Principles on the Benefits of Manufacturing Process Flexibility,” Management Science 41, no. 4 (April 1995): 577–594. The authors show that, in assigning products to plants, most of the flexibility gain is achieved from increasing the number of products made at each plant from one to two. Thereafter, there are diminishing returns to scale.

8.J. Martha and S. Subbakrishna, “Targeting a Just-in-Case Supply Chain for the Inevitable Next Disaster,” Supply Chain Management Review 6, no. 5 (September 2002): 18–23.

9.A. Latour, “Trial by Fire: A Blaze in Albuquerque Sets Off Major Crisis for Cell-Phone Giants,” Wall Street Journal, Jan. 29, 2001, p. A1.

10.H.L. Lee and M. Wolfe, “Supply Chain Security Without Tears,” Supply Chain Management Review 7, no. 1 (January–February 2003): 12–20.