How to Bounce Back from Disruption in Supply Chains
August 18, 2020 | Expert Insights
Janat Shah, Director IIM Udaipur was a panellist In the 81st Synergia Forum’s 17th Virtual Forum on Supply Chain & Core Resilience Capabilities. This report is based on his views expressed during the discussions.
"How prepared are we for the possibility of an event like this?... How do we understand disruptions? First, not all disruptions are alike- they differ in terms of scale, they differ in terms of scope. Second, for the same business (industry) different organizations are affected in different ways."
On March 17, 2000, a fire broke out in a Philips Electronics radio frequency chip manufacturing plant in Albuquerque, New Mexico. The contamination from the smoke, as well as the water used to douse the fire, caused immense damage to several millions of chips that had been stored for shipment. The differing responses of Philips customers would go on to be a clear illustration of the importance of resilient supply chains.
Around 40 percent of the plant's shipments were to be purchased by Nokia and its rival Ericsson, the two leading firms in their industry. This event broke the link in the supply chain of both firms. However, in the third quarter of 2000, Nokia’s profits rose 42 percent as it expanded its share of the global market to 30 per cent. Its quarterly statements and annual report for 2000 did not even mention the fire. On July 20, 2000, Ericsson reported that the fire and component shortages had caused a second-quarter operating loss of $200 million in its mobile phone division. They would also go on to register a significant loss in market share.
It was this example that Professor Janat Shah used to drive home the point of the importance of understanding supply chains, ensuring that they are resilient, responsive, and flexible, and how doing so can grant a competitive edge for a firm when crisis strikes.
Prof. Shah described the traits that a resilient supply chain has, and how they can be used. Understanding and implementing these traits are increasingly relevant in a world economy where supply lines have been so deeply impacted by the current pandemic.
First, he stressed the sheer inevitability of a disruption to the supply chain of a company. Most companies have a supply chain that stretches across cities and even countries. Disruptions are a part of reality, so much so that a lack of disruptions itself can be a cause for suspicion.
Resiliency in a supply chain translates to the ability of a company to withstand or bounce back from the impact of a disruption. A strong supply chain not just has the ability to survive, but also the capability to capitalise on the losses of its competitors, who might be similarly affected by the same disruption. The example above of Nokia and Ericsson shows just that.
FACTORING IN RISKS
A corporation must include risk management as a part of its agenda. These risks must first be understood. Every company must understand and be aware of its suppliers, the suppliers of their suppliers, and so on, for several tiers. Nokia maintained a close relationship with Philips and used an input system to monitor their shipments, allowing them to learn of the crisis. It collaborated with Philips to shift production to other Philips and non-Philips plants. Ericsson, on the other hand, only heard of the fire in April, and did not share a strong relationship with Philips to allow them to swiftly find alternative means of production.
Prof. Shah also cited the impact of the most-recent U.S. - China trade war. Upon hearing of the changing geopolitical climate, it took several companies months to realise that Chinese manufacturing was a part of their supply chain, several tiers away. Being aware of every link in the supply chain can make a huge difference for a company.
The second question companies should ask themselves is what the costs and benefits can be for investing in supply chain resilience. After all, many of the methods of supply chain resilience can be costly, like maintaining excess inventory or using multiple suppliers. Whilst Prof. Shah stresses that there is no formula that can determine the optimum amount of investment, many companies can use creative methods to reduce inefficiency and increase resilience in the supply chain, at a low cost. Technology can be a game-changer, allowing resources to be manufactured and transported at low costs in more locations than ever before. The advent of 3D printers, and their promise in manufacturing, can allow companies to make their supply chains much more efficient.
Additional concerns are that more investments will mean increased costs for the customer, making a company less competitive than its rivals. A challenge exists for companies to justify the cost of resilience to their customers, lest they lose them to their competitors.
Supply chain resilience can allow a company to not just survive but also get ahead of its competitors in the wake of any crisis — whether it be a geopolitical one, like the Sino-Indian tensions, or the trade war, or a public health one like the pandemic, or even a regional, temporary disruption, like the fire in the Philips plant.
Author: Synergia Foundation Research Team