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 airshipments.)
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?
tsunami in Japan in 2011
floods in Thailand in 2011
typhoon in the Philippines in 2013
volcano in Iceland in 2010
2. A company that is primarily interested in risk reduction will focus on supply chain
3. Why are managers sometimes hesitant to institute supply chain risk-reduction measures?
Such measures raise short-term costs and may never be needed if no disaster occurs.
The probability of recurrent risks often significantly exceeds the probability of disruption risks.
Risk reduction is a long-term tactic, whereas managers tend to be rewarded for short-term results.
All of the above.
4. Which of the following is a recommended supply chain risk-reduction tactic for disruptive risk?
decrease the number of suppliers
decrease excess capacity
disperse suppliers geographically
Click to select your answer.
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