Supply Chain Risk Management: Tension between Lean and Resilient Principles

Stephen DeAngelis

April 12, 2012

Rich Becks, General Manager for High-Technology at E2open, notes that “supply chain visionaries have promoted outsourced manufacturing, vendor-managed inventory (VMI), and third-party logistics providers (3PLs) to handle everything from procurement and materials handling to manufacturing, transportation and warehousing.” [“Risky Business: Re-Thinking Supply Chain Risk and Resiliency,” SupplyChainBrain, 23 February 2012] Becks admits that the cost savings from these initiatives were impressive, but that “many businesses worried that sacrificing control of these critical operations would introduce a number of business risks.” What risks? “Specifically, would outsourced vendors act in their own self interest, as opposed to supporting the needs of the end consumers?” Another way of putting it would be to ask, “In a crisis, who do you trust?” This post, however, is not so much about trust as it is about finding the sweet spot between cost savings (lean principles) and robustness (resilient principles). For years, cost savings has had the upper hand, but some companies are now questioning that strategy. Becks continues:

“Vast amounts of capital have been released from bloated supply chains by requiring suppliers to stock their own components in just-in-time (JIT) warehouses next to their customers. For brand owners, VMI has nearly doubled inventory turns while allowing them to reinvest windfall savings into new product development and marketing. … As long as market demand grew, supply did not seem to be a problem as new competitors rushed into business fueled by cheap money and the capacity to grow their share of the ever expanding market. Everything seemed ‘just right’ as supply chain professionals took on even more risk through initiatives like supplier rationalization (more volume to fewer suppliers for greater cost reductions), larger centralized manufacturing industrial parks, and the consolidation of air and ocean freight carriers. Throughout the ’90s, good supply chain people were practically minting money by concentrating on fewer providers doing more value-added work.”

Risk managers have looked on skeptically as these initiatives have been implemented. A risk manager’s greatest nightmare is being caught in a situation where a single point of failure can bring the whole system to a halt. Although things may not have gotten quite that scary, lean principles have undoubtedly caused a few sleepless nights for those who must worry about supply chain resiliency. Becks continues:

“By the end of the ’90s, most supply chains had successfully leaned out their inventories, reduced a great deal of overhead waste, and were tuning JIT deliveries across the globe with incredible precision. Supply chain speed and flexibility was the mantra as customers began to expect unparalleled levels of service. Products that should take months to procure and manufacture were promised within days of customer requests. And then nature took its course…

“• A tsunami devastated critical nuclear reactor capacity in Japan, which served electricity to semiconductor manufacturers supplying nearly 40 percent of the world’s 12-inch wafers capacity

“• Airfreight passed reawakened volcanoes near Iceland, disrupting transportation and deliveries into and out of Northern Europe

“• Supplies of components passing hot spot areas (e.g., Sudan) experienced cargo theft and transit delays

“• An increase in extreme weather events, including tornadoes, high winds, and snowstorms, caused thousands of missed shipments worldwide

“• And most recently, a massive flood in Thailand swamped production of critical high-tech products and equipment

“Companies around the world began realizing that one catastrophic supply chain event could wipe out years of profits and hard-earned market share gains.”

It’s clear that many companies failed to conduct “what if” exercises (or, if they did, ignored the results). Becks laments the fact that international trade resulted in “a new breed of ‘risk management professional'” who was “specially trained in international trade laws—but [had] little experience or insight into the complex operations of today’s end-to-end trading networks.” As a result, “this new type of professional was not well positioned to spot the structural risks accumulating in global production systems, a shortcoming that would make itself all too obvious in the record-setting year of 2011.” He continues:

“What is becoming clear is that the ability to rapidly ‘sense and resolve’ supply chain disruptions is now part of the job. Natural disasters and other large-scale disruptions leave no time to re-plan. Global supply chains are beginning to re-think network design in order to gain the ability to identify risk probabilities and prepare recovery scenarios in advance. Leading companies are deploying business networks to more effectively manage end-to-end supply chain risk.”

I agree with Becks that once you get the corporate mindset right, supply chain visibility plays a critical role in both preparing for and responding to supply chain challenges. Becks notes that end-to-end supply chain visibility begins “with any-to-any electronic connectivity across multiple tiers [and] business networks [to] provide the business process logic needed to put real-time information into action.” This kind of connectivity involves Big Data and inevitably “relies on a cloud-based platform that offers visibility into inventory levels and partner activities, as well as a mechanism for collaborative problem solving.” Becks continues:

“According to a 2011 research brief by Aberdeen Group, ‘When it comes to unplanned events … it is clear that companies perform better, and demonstrate more execution agility when they operate on a collaborative technology platform that allows for bidirectional data flows on a near real-time basis.’ Such cloud-based, business network platforms offer companies unprecedented insight into current and projected performance with adequate time to redeploy or redirect assets in motion to solve problems. Visibility into all network shipments and inventory also enables brand owners to ‘virtualize inventory,’ allowing them to rapidly resolve exceptions using work-in-progress (WIP) inventory throughput and goods in transit as available supply to project against future demand.”

For some time now, supply chain analysts like Lora Cecere have insisted that companies need to have visibility from a supplier’s supplier to a customer’s customer. Becks reports that “a survey by FM Global published in early 2011 indicated that a growing share of supply chain losses was caused by sub-tier suppliers (upwards of 50 percent).” He continues:

“Additionally, in a December 2011 publication in Harvard Business Review, co-authors Thomas Choi and Tom Linton suggest that ‘Lower-tier suppliers that serve a number of markets often spot shifts in the economy early on—and can warn customers about them.’ These trends serve as additional proof points for a collaborative, business network approach, and emphasize the growing importance of multi-tier supplier management.”

Becks warns that small suppliers should be monitored closely “because they keep their businesses very lean” and, therefore, very susceptible to disruption. He concludes, “The ability to see, collaborate and resolve disruptions as they occur—whatever the magnitude—is what defines a risk-resistant and resilient supply chain.” A survey by the Business Continuity Institute confirms Becks’ observations. It showed that manufacturers are now questioning “whether the move away from ‘redundancy’ – idle capacity and buffer stocks, in favour of lean and ‘just-in-time’ supply chains,” was such a good idea after all. These actions have “left manufacturers vulnerable in times of crisis.” [“In Wake of Japanese Earthquake, Companies Ask if Supply Chains Can Be Too Lean, Study Finds,” SupplyChainBrain, 15 March 2012] Lyndon Bird, a BCI board member, told the SupplyChainBrain staff, “The Great East Japan Earthquake exposed the acute vulnerability of a complex, interdependent system of global supply chains, which affected businesses thousands of miles away from the earthquake and tsunami itself. The perpetual quest for supply chain optimisation has taken a pause, and we are seeing signs of a more considered approach to supply chain risk with businesses leveraging techniques such as business continuity management to better understand their vulnerability and to put in place measures to improve resilience and continuity when faced with disruption.”

Richard Douglass, industry director of manufacturing with IBM, agrees “that supply chains are becoming more complex” and that supply chain disruptions can no longer “be dealt with on an individual, ad hoc basis.” [“Forging a Risk-Tolerant Supply Chain,” SupplyChainBrain, 5 March 2012] He also agrees with Becks that supply chain visibility is a key issue. Unfortunately, “according to a recent IBM survey of chief supply chain officers, [supply chain visibility] is largely inadequate.” He told the SupplyChainBrain staff, “You can’t manage risk … without visibility to the entire process.” The article continues:

“IBM sponsored a study with the University of Maryland on the subject of ‘de-risking’ the supply chain. It focused on such best practices as the creation within companies of risk-management boards that can engage in scenario planning and network optimization. Their efforts help to determine where assets should be placed, in order to minimize the vulnerability of a company’s supply chain to any number of potential disruptions. Proper inventory optimization is another key to minimizing risk, Douglass says, with companies scrutinizing how much raw materials and finished goods they should be placing with critical suppliers and distributors. Essential to that effort is the ability to ‘adjust on the fly.’ Automation is a critical element of any effective risk-management plan today. It can be applied to such key processes as load tendering and consolidation, and the determination of optimal routes for the movement of freight. Unfortunately, says Douglass, ‘A lot of companies on the transportation side still manage to a fair degree with manual [processes] and spreadsheets.'”

Not everyone agrees that the tension between lean and resilient principles is going to be lessened by improving resiliency. Stephen Dean, senior vice president of sales and marketing with Ryder, told the SupplyChainBrain staff “that Lean inventory and manufacturing strategies aren’t necessarily a path to greater risk. Lean, he says, is all about ‘predictability, error-proofing and standardized processes.’ It can help companies to offset the disadvantage of longer supply lines, while minimizing reliance on buffer stock.” I suspect that Dean might be in the minority with that view and that most supply chain risk managers will come to the conclusion that lean practices increase risk across longer and more complex supply chains. On the other hand, companies can’t ignore cost savings (an area where lean principles shine). Finding the right balance (i.e., the appropriate level of tension) between lean and resilient principles will continue to occupy boardroom discussions in the years ahead.