Editor's Note: Take a look at our featured best practice, Organization Design Toolkit (103-slide PowerPoint presentation). Recent McKinsey research surveyed a large set of global executives and suggests that many companies, these days, are in a nearly permanent state of organizational flux. A rise in efforts in Organizational Design is attributed to the accelerating pace of structural change generated by market [read more]
Building Resilience into Supply Chains
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The supply chains of most companies, large and small, exploit a world of opportunities. But, increasing global exposure comes with an increasing range of risks. These companies’ complex networks of suppliers and customers are as diverse as the goods and resources they manage. Within the same supply chain, giant multinational companies can sit side-by side with small to medium enterprises (SMEs). Yet, among companies large and small, there is growing awareness that extreme weather and a changing climate pose new risks and opportunities to old ways of doing business.
Smart businesses know how to manage uncertainty. As their exposure to extreme weather increases, informed businesses are incorporating the risk of extreme weather into existing risk management. Meanwhile, business continuity planning is growing to embrace the need to think about how a changing climate impacts on business.
Worldwide companies are increasingly aware that their supply chains are exposed to greater weather extremes. International competition and cheap transportation have led to expansive supply chains linked by complex logistics, multiplying risks to business continuity. The Business Continuity Institute’s latest Horizon Scanning Survey, with results from 700 organizations in 62 countries, found 53% of the survey respondents were either ‘extremely concerned’ or ‘concerned’ about the impacts of adverse weather on their businesses (BCI 2013). Business leaders are now urging companies to think about climate change (Business Green, 2013).
Awareness and experience is turning into action, as leading companies large and small begin to respond to risks and opportunities. Yet there is little guidance for companies which see their supply chains might be at risk but aren’t sure how to respond. This guidance seeks to assist global and or growing global companies systematically to identify, assess, prioritize and act against risks and to seize opportunities that extreme weather and a changing climate pose to their supply chains. This guidance shows that it doesn’t take a climate expert or lots of time and resources to build resilience. Making targeted changes in supply chain operations can reduce risks and gain a competitive edge.
Why should businesses act?
Our climate is changing and will continue to change into the future. In the UK, we are likely to experience more flooding and face warmer, possibly drier summers in future. Other parts of the world face even greater changes in temperature and extreme weather events than the UK does.
The costs of extreme weather to business are growing. Flooding in 2012 and 2013 alone was reported to have cost the economy 12 billion during the summer and autumn months (Gray 2012). Threats abroad can have significant impacts too. The effects of the Thai floods of 2011 rippled through international supply chains disrupting the supplies and logistics of many businesses. As well as bringing possible changes to the frequency and severity of extreme weather events, a changing climate is also about longer term incremental changes in average climate. Here, risks and opportunities will materialize over a longer period of time, such as changes in consumer habits and markets.
Value Stream mapping of supply chains in detail helps to identify risks and opportunities and to target investment towards identifying and taking action. For example, some companies which presently rely on overseas agricultural supplies are investing in research into opportunities for improving yields where a future climate may provide more favorable growing conditions. Switching to domestic suppliers can reduce the risks inherent in long distance transport logistics and supply planning. Some engineering design consultancies are also beginning to respond by taking account of future climate projections in today’s building designs.
Supply chains work best when each part works together. But risks in one part can flow into the others. For example, if procurement of commodities and raw materials from a supplier becomes limited due to climate-related influences, the absence of an operational buffer will affect a company’s internal manufacturing operations, placing customer order fulfillment at risk. Following direction will help business decision-makers identify how particular activities face particular risks and what to do in response, protecting against such forceful problems.
Just in Time versus Economic Order Quantity versus Stockpiling
Risks of disruption can vary significantly from company to company within a supply chain. Factors can include:
- the size of the company
- its geographical location
- whether it supplies climatically sensitive materials
- the distances and type of transport methods used
- whether it’s a ‘just in time’ or stockpiling type of supplier
But, in a lean supply chain, it only takes one weak link to disrupt business for its partner companies, no matter how well prepared they are.
The JIT supply chain structure provides the minimum inventory required to support operations until the next delivery of supplies. This reduces the inventory held by a business and its carrying costs, at the same time, maximizing profits through a lean, efficiency-driven process.
The EOQ model is typically used when demand for a product is constant and each new order are delivered in full when an inventory reaches a reorder level. It’s aimed at minimizing the joint costs of ordering and holding inventory, whereas JIT only minimizes the costs of holding inventory.
Companies operating or reliant on a JIT model are more prone to upstream supply shocks. Impacts on one supplier in the chain can quickly manifest themselves as disruptions to downstream supply chain members. The Thai floods of 2011 represented the insurance industry’s highest recorded flood loss event, with business disruption to over 14,000 companies’ worldwide (Lawton 2011). The floods were reported to have widely disrupted the international supply of motor and consumer electronic parts. In the UK, Honda cut production at its Swindon plant by 50% and delayed the launch of a new model. The Thai floods also raised the issue of reliance on ‘clustered’ industries where similar types of suppliers are grouped in the same region.
Although in the case of the Thai floods stockpiling in the downstream supply chain may have provided more resilience to upstream shocks, stockpiling itself has its own risks. These include damage to large quantities of stock stored in vulnerable locations. While neither model is fully resilient, companies need to begin to think through how climatic “assaults” may differ between these approaches.
Whether large or small, domestic or international all are being exposed to new business risks and opportunities as our climate changes. This framework will help businesses to identify new risks and opportunities within their supply chain and work out how to respond.
There are five steps companies should be asking themselves to gauge their readiness of supply chains. These questions will help you to look at and manage each part of your supply chain: your supplier relationship, your internal supply chains, and your customer relationship.
Does the climate change manifest itself as a material issue?
Different parts of a supply chain will experience different impacts of a changing climate, with different levels of risk along the supply chain. Should ask a series of questions of each – supplier, the firm and the customer. Following are some sample questions:
- Located or stockpiling in a vulnerable location?
- Providing climatically sensitive materials?
- Transporting over long distances?
- Awareness of impact on staff/operations of prior weather events?
- Acknowledging climate change as a risk?
- At risk of not recovering quickly from an extreme event?
A “yes” answer to more than 3, would suggest a plan needs to be put into place to build resilience in the supply chain.
Set goals and develop a strategy to understand and address the climate risks facing your supply chain.
Gather evidence and information on past experience of weather disruptions to your supply chain.
Begin raising awareness in your company that climate variability and change may pose material issues to your supply chain.
Organize a meeting with team members from supply chain management, risk management, customer relations and corporate responsibility.
Assess current knowledge of climate risks among the team. Identify existing processes or management systems that can pick up weather-related risks.
Will they be robust in the face of a changing climate?
Consider which steps of this guidance can be integrated within existing processes and management standards such as: ISO 28000 (supply chain security), ISO 22301 (business continuity) or ISO 9001 (quality management).
Upon putting a plan into place, an assessment of risks and opportunities are required. Dig deeper to understand how and where climate variability and change will affect your supply chain.
Successful business leaders already know how to manage risk. The changing climate may pose new risks to supply chains, but with the right information, business decision-makers can use familiar corporate tools to assess climate risks and opportunities.
The following sections ask a series of exploratory questions to encourage analysis and discussion on the risks and opportunities presented by a changing climate. Answers collected in this step can be used within a number of standard corporate processes including risk matrices, risk registers, country risk assessments and feasibility studies.
- Who are your suppliers, and who supplies them? Where are they located?
- Are the suppliers you rely on going to be increasingly impacted by weather disasters or a changing climate?
- What is your supplier distribution? Are they clustered in a single geographical area and so all vulnerable to the same disasters?
- Have you sought out local suppliers to reduce risks of transport disruption?
- Are the raw materials you rely on susceptible to damage or loss of quality from weather or climate change?
- Have you looked at ways of moving towards multiple sourcing?
- What do your supplier contracts say about disruption due to weather events?
Buying and pricing
- Are the prices you pay directly or indirectly affected by weather events or climate change?
- Do you have strong lines of communication for collaboration?
- Do the strategic goals and climate awareness of your suppliers align with your company’s goals and awareness?
- Have you built trust and loyalty with your suppliers to foster collaboration during crises?
- Think about the best practices or methods to build resilience. Or in other words, prioritize and identify actions to be taken.
- Which supply chain relationship holds the greatest risks? Your internal supply chain, relationships with your suppliers or with your customers?
- Which of the identified risks pose the greatest threat to your supply chain?
- Which opportunities offer the greatest benefit to your company?
- Which opportunities is your company ready to seize?
- What actions are considered good practice in today’s climate and are likely to offer benefits regardless of climate change?
- Lastly, don’t wait to build resilience. Climate change is an ongoing challenge. Having identified your actions, it’s now time to implement them. As you take action and manage your climate risk, it’s important to continually monitor your success. I suggest certain criteria to be used in managing, monitoring and measuring the risks:
Manage your risks
- Identify periods in the business cycle where it’s opportune to implement actions. Examples might include when designing new facilities, or acquiring new assets and long-lived equipment.
- Assign responsibility to carry out identified actions.
- Assign budget lines to sustain actions.
- Establish mechanisms for recording and sharing successes and shortcomings, be it setting up new systems or modifying existing ones.
Monitor your progress
- Review your goals established in Step 2.
- Monitor the continued relevance, effectiveness and performance of the actions by adopting a continued improvement approach. Design a ‘checklist’ or a monitoring and evaluation plan – ensure lessons learned can inform the ongoing process of ensuring resilience and how the actions may influence future planning and investments.
- Identify whether adjusting actions need to be made.
- Review the impact of actions with your suppliers – what benefits have been realized and why? Were there any non-beneficial affect?
In conclusion I would like to leave you with several questions:
- What can a small company do when its suppliers in Peru are in trouble?
- How can you build resilience without .breaking the bank?
- What emergency response options does a retail chain have after a natural disaster?
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79-slide PowerPoint presentation
About Stuart RosenbergStuart Rosenberg has a regional reputation as a subject matter expert and published author in Supply Chain Management and Lean Six Sigma disciplines. He has outstanding knowledge of all inventory control functions in both manufacturing and distribution environments, and grasp of all data involved with all inventory systems, cost analysis and product evaluations. Stuart has initiated, managed and oversaw all inventory control environments and situations, with direct supervision of various warehouse locations, to certify continuous accuracy, reliability and integrity of companies inventory operational and financial data. He has influenced, counseled, and directed major revisions to enhance companies operational efficiencies. You can read more about Stuart on his blog and find him on Linkedin here. Stuart also has several thought leadership papers available on Flevy (srosenbe7).
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