Each day thousands of freight trains and commercial trucks chug across national borders delivering vital supplies. Hulking ships carry the largest of material slabs and the smallest of cogs over international waters. The movement of commerce buzzes around the globe as nations contribute to the economic health and welfare of each other. But what happens to companies when seemingly reliable supply chains are disrupted or break down?

All Risks Are Rarely Contemplated

It is virtually impossible to accurately assess and understand the impact of the untold risks a supply chain may incur. And there are many reasons for this, including the presence of “black swans.” According to author Nassim Nicholas Taleb, a black swan, a term he coined, is a highly unlikely event that carries a massive impact.

On March 11, 2011, a black swan devastated Japan. It involved not one, but a series of highly unlikely events beginning with a violent earthquake and ending in a tsunami and a nuclear crisis. In addition to a tremendous loss of life and property, Japanese suppliers to the United States were paralyzed for months. In turn, many American supply chains broke down causing a harmful ripple effect through several industries.

Planning for the Unpredictable

For those managing a company’s supply chain, deliveries may be severely delayed or no longer available in the wake of wars, terrorist threats, civil strife, strikes, natural disasters, severe storms, or other factors. Due to the inability or unlikelihood of predicting various risks, companies participating in worldwide supply networks must carefully consider how they will react if the flow of supplies is negatively impacted for whatever reasons.

Thus, an American company relying on supplies from a Canadian factory must anticipate delays due to border security issues. But it also must contemplate delays caused by a variety of unknown factors and plan accordingly.

If risk can be better analyzed, it can be better addressed.

Weathering the Storm

The World Economic Forum’s Supply Chain Risk Initiative focuses on creating new models and metrics to deal with issues that may damage a transportation network. Based on a 2011 Forum survey, 90 percent of organizations felt increasingly concerned about the stability of their supply chains during the five preceding years. Disruptions to supply chains due to environmental problems such as natural disasters and extreme weather were cited as the least manageable.

Companies can address such uncontrollable risks by maintaining relationships with backup supply providers in different parts of the world. According to Nick Wildgoose, a supply chain expert at Zurich Financial Services, companies may be forced to look beyond “tier one suppliers” for the sake of a stable supply chain.

Although a supplier may appear attractive because of certain factors, such as low manufacturing and assembly costs or high product quality, location issues could trump these and other considerations. An ideal supplier, whether used for primary or for contingency purposes, must be selected after careful consideration of various factors, including environmental, geopolitical, and economic conditions in the supplier’s home country or region.

A supply chain also may be strengthened or protected through the presence of backup inventories. Although this necessitates additional costs, the vital time afforded by stockpiled resources may provide enough time to remedy a problem. Given the precariousness of global trade stability, as seen through the chaos and infrastructure breakdown caused by natural disasters, a well-stocked inventory could be a savior for a supply chain in need of rescue.

Furthermore, Steve Culp of Accenture Risk Management advises that companies keep detailed track of their supply chain logistics, monitoring and quantifying risk through a clear performance metrics system. By compiling and tracking statistics on fill rates, delivery delays, and other pertinent factors affecting a supply chain, a company can identify weaknesses and inconsistencies in a network. If risk can be better analyzed, it can be better addressed.

Known and unknown risks will always be present in supply chain systems. Sound supply chain management requires an awareness of potential risks, a well-chosen selection of primary and alternative suppliers, and, if possible, a just-in-case inventory of vital supplies if just-in-time deliveries fail.

This article appeared in International Insights, a Fifth Third Bank publication, April 2013

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.

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