Supply chain disruption and the sudden halt in trade has exposed how interdependent countries are in sourcing and manufacturing. An article published in the Wall Street Journal presents the example of Scania, a Swedish company that makes of trucks, buses and engines. The article notes that the company has tried to have at least two sources for most of the 21,000 components it uses. However, for about 35 components (including welded, case and electronic parts) that are unique the company uses only one source. The inability to source some of these components from France during March resulted in a shut down on global operations for a couple of weeks. Idle factories led to stoppage of buying parts, which then cascaded in the supply network resulting in slowed production and purchase of components for suppliers in Asia and Europe that are in further upstream tiers of the supply network.
Development in supply chain capabilities and cross border trade agreements has led to almost a third of global trade to take place within multinational companies, according to an estimate from United Nations. The move towards long-term relationships and supply base consolidation has made several supply chains vulnerable to potential disruptions.
Many companies are vulnerable to supply chain risk, with potentially significant impacts. According to a report by National Institute of Standards and Technology (2015):
- 11% revenue at risk for a significant supply chain disruption, if not immediately and strategically addressed
- 25% average reduction in share price resulting from a publicly disclosed supply chain disruption
- 30% lower shareholder returns for companies announcing supply chain disruptions compared to peer group
A study by the University of Tennessee (2014) reports that:
- there is 98% likelihood that a manufacturer will experience a disruption in the next 24 months
- 53% of companies have strategic backup plans for factory or distribution center shutdown
- 49% of companies with suppliers could continue to supply if they suffered a disaster in one location
Harris Corporation (2016) notes that 20% of companies go bankrupt within 24 months of a moderate-to-severe supply chain disruption.
According to Deloitte’s survey, a typical company’s vendor base has experienced 15% year-over-year growth, both in number of relationships and volume of transactions. According to Deloitte’s supply chain risk prevention framework, organizations should take the following three steps:
1) Initial involvement
a) Initial exposure assessment
- Multifaceted illumination of disruptive risks
- Multitiered supplier ecosystem
- People
- Production
- Finished goods
- Quality
- Logistics
- Opportunities
- Prioritization and mitigation plan opportunities
- Future roadmap planning (immediate, mid-term, and long-term actions)
c) Mitigation and corrective action
- Mitigation
- Identify alternatives to limit operational disruption
- Prioritize corrective actions to limit operational disruption
- Corrective action
- Execute corrective action plan to mitigate disruption events
2) Steady state control
- Control evaluation and development to achieve operational continuity
- Development of KRIs and KPIs to support operational control
- Planning and optimization for operations “restart” leveraging industry leading practices
3) Future risk planning
- Predictive risk analytics
- Risk dashboards and preventative program management, including risk sensing to look ahead to future disruptive events
Sources:
Hannon, P. & Woo, S. 2020. Steep Drop in Trade Flows Shows Pitfalls of Cross-Border Supply Chains. Wall Street Journal May 25, 2020.
Third-party governance and risk management,” Deloitte’s 4th annual extended enterprise risk management survey report, 2019, https://www2.deloitte.com/us/en/pages/risk/articles/ third-party-risk.html?id=us:2el:3dp:wsjspon:awa:WSJRCJ:2020:WSJFY20
“Best Practices in Cyber Supply Chain Risk Management,” National Institute of Standards and Technology, 2015.
“Managing Risk in the Global Supply Chain,” University of Tennessee Supply Chain Management, Summer 2014.
“What’s in your Supply Chain War Room?,” Harris Corporation, March 22, 2016.
"Preventing supply chain disruption during the COVID-19 crisis” Deloitte. https://www2.deloitte.com/content/dam/Deloitte/us/Documents/financial-services/us-covid-19-supply-chain-infographic.pdf