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For supply chain executives, recent years have been notable for the number of major supply chain disruptions that have highlighted vulnerabilities

For supply chain​ executives, recent years have been notable for the number of major supply chain disruptions that have highlighted vulnerabilities for individual companies and for entire industries globally.​ (The Japanese tsunami in 2011 left the world auto industry reeling for months.​ Thailand's 2011 floods affected the supply chains of computer manufacturers dependent on hard disks. The 2010 eruption of a volcano in Iceland disrupted millions of air travelers and affected​ time-sensitive air​shipments.)

​Today's managers know that they need to protect their supply chains from serious and costly​ disruptions, but the most obvious solutionslong dash


—increasing ​inventory, adding capacity at different​ locations, and having multiple supplierslong dash


—undermine efforts to improve supply chain cost efficiency. While managers appreciate the impact of supply chain​ disruptions, they have done very little to prevent such incidents or mitigate their impacts. This is because solutions to reduce risk mean little unless they are weighed against supply chain cost efficiency. Financial performance​ is, we​ know, what pays the bills.

Supply chain​ efficiency, which is directed at improving a​ company's financial​ performance, is different from supply chain​ resilience, whose goal is risk reduction. Although both require dealing with​ risks, recurrent risks​ (such as demand​ fluctuations) require companies to focus on efficiency in improving the way they match supply and​ demand, while disruptive risks require companies to build resilience despite additional cost.

The MIT​ study suggests two strategies for reducing supply chain fragility through containment while simultaneously improving financial​ performance: (1) segmenting the supply chain or​ (2) regionalizing the supply chain. In many​ instances, though, reducing disruption risk involves higher costs. The reason executives are reluctant to deal with supply chain risk comes from the perception that risk reduction will reduce cost efficiency significantly. Managers can do much to ensure that loss of cost efficiency is minimal while the risk reduction is substantial by avoiding excessive concentration of resources like suppliers or capacity. And nudging​ trade-offs in favor of less concentration by overestimating the probability of disruptions can be much better in the long run compared to underestimating or ignoring the likelihood of disruptions.

Critical Thinking Questions

1. Which of the following events affected the supply chains of computer manufacturers dependent on hard​ disks?

A.

tsunami in Japan in 2011

B.

floods in Thailand in 2011

C.

typhoon in the Philippines in 2013

D.

volcano in Iceland in 2010

2. A company that is primarily interested in risk reduction will focus on supply chain

A.

economy.

B.

recovery.

C.

resilience.

D.

efficiency.

3. Why are managers sometimes hesitant to institute supply chain​ risk-reduction measures?

A.

Such measures raise​ short-term costs and may never be needed if no disaster occurs.

B.

The probability of recurrent risks often significantly exceeds the probability of disruption risks.

C.

Risk reduction is a​ long-term tactic, whereas managers tend to be rewarded for​ short-term results.

D.

All of the above.

4. Which of the following is a recommended supply chain​ risk-reduction tactic for disruptive​ risk?

A.

decrease the number of suppliers

B.

decrease inventory

C.

decrease excess capacity

D.

disperse suppliers geographically

Click to select your answer.

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