Planning for Increased Supply-Side Risk

Article excerpt

EXECUTIVE SUMMARY | Supply chain planners are relatively adept at coping with demand-side uncertainties by using various buffering strategies, such as deploying inventory safety stocks. However, given all the global turmoil that we have been seeing recently, these managers will now have to grapple with greater supply-side uncertainty when planning for global supply chains. Decision Analysis is one approach they might use. Equally important, they need to change their mindset and recognize that while the best planning decisions increase the chances of good outcomes; bad outcomes might still happen.

After the Global Financial Crisis hit in 2007, I began to think, write, and talk about the increased uncertainties that forecasters and supply chain planners would have to face in the future - in terms of supply as well as in demand. Most managers are reconciled to the fact that customers are fickle, thus demand is uncertain and forecasts and plans are invariably inaccurate. They are adept at coping with demand uncertainty by using various buffering strategies including the deployment of inventory safety stocks. However, they are not very accepting of the uncertainty and risk in the supply-side operations that they plan for.

In mid-June 2008, I was invited to be part of a panel at a manufacturing conference. I decided to talk about my ideas on the uncertainties to an audience of hard-nosed manufacturing and supply chain managers. Another member of the panel was a well- respected manager whom I considered to be one of the best practitioners in the field. After he heard what I had to say, he agreed with me about demand-side uncertainty (and the fact that it might increase significantly); however, he refused to accept that there would ever be supply-side uncertainties that he couldn't manage around.

Not surprisingly, the audience agreed with him since these practitioners are "can-do" people. They feel that they go through great pains to engineer their supply chains so that any customer demand will be met, period! All internal and external supply sources know in advance what they are supposed to do, and are fully prepared to keep goods flowing to meet demand no matter what happens.The mindset of these managers is to plan well enough in advance to get it mostly right, and later, if/when things don't go according to the plan, fix it. For example, they might resort to expediting and redirecting shipments, as well as changing plant schedules to produce goods on an emergency basis.

This modus operandi has bided well over the years because the level of supply-side uncertainty was relatively insignificant compared to that on the demand-side. Thus, when things did go amuck with supply, they could recoup despite the fact that the actions taken led to increased costs and inefficiencies. However, as the past year has shown, things have been changing.

MORE UNCERTAINTY FROM GLOBAL FORCES

Assupplychains have gotten longer and more global, so has the chance that some bad event - which happens almost daily around the world - will disrupt some aspect of them. Supplyside turbulence and uncertainty is driven by various forces including financial events, Mother Nature, politics, and other factors.

When the financial meltdown hit, the financial supply chain froze to a standstill for some time from a dearth of credit worldwide. Credit is still hard to get and this puts the financial viability of small upstream suppliers at risk, potentially cutting off the supply of the materials that manufacturers need. Forces of Mother Nature - for instance, the Japanese Tsunami and Thai floods in 2011 - disrupted the high-tech and automobile supply chains for quite some time.

Also, with the worldwide economy still fragile, political forces are starting to hamper and disrupt supply chains, especially those including offshore manufacturing and outsourcing. Worker unrest in China, for example, required Apple and Foxconn to accommodate the growing demands of their workers. …