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January 1, 2004

Awake in the Dark

Assessing your weakest link is the best way to plan for supply chain disruptions.

by Ram Reddy

The 2003 Northeast power outage (Aug. 14-15, 2003) caught many by surprise. While post-Sept. 11, companies have focused primarily on securing supply chains from terrorists, this approach is shortsighted, as demonstrated by the estimated $118 billion cost of the outage (www.ieeeusa.org). The absence of a supply chain disruption contingency plan to address vulnerabilities was felt at all levels in the private (manufacturing and service companies) and public (agencies participating in supply chain activities, from ports to security services) sectors.

The modern corporation is moving toward a network model, with many business processes being performed by external partners. In response to government needs for security, IT vendors have developed solutions aimed at making supply chains 100 percent secure. As an old parable in the IT world states, the only way to guarantee a 100-percent secure computer system — or supply chain in this case — is to lock down the system and ensure no user interaction. Furthermore, the costs of a totally secure supply chain are significant and would send the prices of consumer products soaring. Given this cost-benefit trade-off, it makes more sense to plan for supply chain disruptions — both artificial and natural.

In this column, I'll discuss how to perform a supply chain vulnerability assessment and develop a contingency strategy for your networked corporation.

The Modern Corporation

Across the world, companies are outsourcing functions — from manufacturing to customer service — to subsidiaries or business partners in geographically remote locations that make the most financial sense. The current economic downturn seems to have accelerated this trend, with corporations increasingly becoming global to cut costs and improve the bottom line. This globalization has dispersed activities, such as sourcing, manufacturing, and distributing products and providing customer service, across multiple organizations around the world.

This evolution toward a global network organization is having a major impact on the way companies assess supply chain vulnerabilities and develop contingency plans. When performing supply chain vulnerability assessments, keep in mind that you're only as strong as your weakest link. Just having a business continuity plan for the corporation isn't enough, given that the modern corporation depends on its supplier networks to manufacture and deliver products and service its customers.

The recent power outage illustrates the impact of upstream supply chain partners on manufacturing firms in other parts of the country. Some manufacturing plants in the southern and western United States came to a screeching halt because critical "just-in-time" parts were primarily sourced from the affected Northeastern and Midwestern regions. Although these firms had multiple sourcing strategies to avoid this scenario, they didn't plan for the eventuality that firms in different states, such as Ohio and Michigan, would cease to ship at the same time.

Firms that had dedicated customer service and order processing centers in the Midwest and Northeast found their operations adversely affected as well. In many instances, these centers were outsourced to an external partner. However, without the order processing centers, inventory piled up at distribution centers until alternative order processing and entry centers were brought online.

Developing contingency plans for all the companies across your supply chain is not only a daunting and time-consuming task, but also is not financially viable.

Instead, as the following example shows, you should create contingency plans for your supply chain's weakest link. This approach depends on a vulnerability assessment that points out critical components, raw materials, and services that are essential to your company's operations.