Supply chain leaders face a growing challenge:

• Significant supply chain disruptions appear to be increasing in both frequency and severity: natural, accidental and deliberate
• Sourcing and distribution trends are increasingly reliant on robust supply chains: global outsourcing, centralized and third party distribution, specialization in manufacturing and materials, lean execution
• Customer expectations continue to rise, with shortened lead times and no tolerance for failure

Disruptions Happen! – Even more frequently than ever. The past decade has cast light on vulnerabilities in the supply chain with a multitude of large scale disruptions, accompanied with human hardship and tragedy – examples:

2003 Northeast Blackout

The 2003 Northeast blackout cast darkness on residents and businesses in the manufacturing heartland of North America: Michigan, Ohio, New York, New Jersey, Vermont, Massachusetts, Maryland and Ontario Canada.

For many, electrical power was unavailable for up to 2 days, interrupting communications, water supply and transportation. Economic impact was estimated at $6B, disrupting automotive assembly and parts, steel and aluminum production, petroleum refining, chemical industries and many smaller businesses. For many, it was a harsh wake-up call to their vulnerability and dependence on the power grid, and their lack of preparedness.

2005 Hurricane Katrina

Hurricane Katrina was the largest natural disaster in US history, with an unprecedented toll in human lives, the environment and business in the gulf region.

Gulf oil production was brought to a virtual standstill immediately following the event, recovering to only 70% after 1 year. Energy costs soared regionally and nationally. The gulf hosts some of the largest ports for waterborne commerce in the US; re-routing and delays were necessary as structural damage and labor shortages were resolved. Chemical, petroleum and agricultural industries suffered extended disruption. Although this event occurred 7 years ago, economic costs are still being tallied and debated; regional costs have been estimated in the range of $150B.

2011 Japanese Earthquake and Tsunami Northeastern Japanese suffered the largest natural disaster ever recorded with the 2011 earthquake, and subsequent tsunami and nuclear disaster.

Almost 19,000 people have been confirmed dead or remain missing. Over 1 million buildings were lost or damaged, including most notably the Fukushima nuclear power plant, where meltdowns necessitated the evacuation of hundreds of thousands of residents and shuttering of businesses. Local infrastructure was destroyed: water supply disruptions and rolling blackouts extended beyond the immediate area of the disaster.

Transportation infrastructure loss was extensive, affecting all local modes of transportation, including 15 commercial ports. Although the primary impact was remote from the more industrialized areas of Japan, the automotive, electronics, and pharmaceutical businesses were among those suffering extended disruption. Although it will be years before recovery and rebuilding is complete, estimates of economic loss exceeding $300B have been suggested.

2012 Hurricane Sandy

Hurricane Sandy’s massive impact may be made worse by the fact of climate change, brought on by man-made carbon emissions. Meteorologists have taken to pronouncing the super-storm the largest to hit the Atlantic Ocean. Superstorm Sandy will end up causing about $20 billion in property damages and $10 billion to $30 billion more in lost business, according to IHS Global Insight, a forecasting firm. The short-term blow to the economy, though, could subtract about 0.6 percentage point from U.S. economic growth in the October-December quarter, IHS says. Retailers, airlines and home construction firms will likely lose some business. The storm cut power to more than 8 million homes, shut down 70 percent of East Coast oil refineries and inflicted worse-than-expected damage in the New York metro area. That area produces about 10 percent of U.S. economic output.

Global scale calamities seem to be arising with increasing frequency and impact to various economics. Much smaller or local events anywhere in the critical supply chain also can induce serious damage to a business.

Are you prepared for the next unexpected event?

Business continuity planning is vital in securing the supply chain - prevention, minimization and recovery from a disruption event. Crisis Management International indicates that large organizations will face a significant disruptive event every 4 to 5 years, impacting business operations for 10 or more days - 73% of these events translate to significant long term impact to the business.

An AT&T study among IT executives indicated that 86% of organizations have implemented a Continuity Plan.

Unfortunately, similar studies have shown that only 30% of large organizations have developed a Comprehensive Business Continuity Plan… covering not only IT infrastructure, but also other key business functions: Operations, Distribution and the broader Supply Chain.

Ironically, many organizations seem to have invested in the safeguards to maintain visibility of unmet demands, and to field Customer complaints, without similar safeguards to preserve the core business: supply chain and the ability to produce and deliver goods or services in a disruptive event.

The process of preparing a business continuity plan will expose plausible risks, their likelihood of occurring, and the potential business impact. It will yield preventive measures along with response plans and recovery strategies for those risks that cannot reasonably be prevented. It will provide the inputs to make judicious decisions regarding redundancies in the company’s infrastructure, operations and supply chain as safeguards against crises and disruption.

Lean Supply Chain: Is it the Enemy of Business Continuity?

Does the adoption of Lean practices increase exposure to supply chain interruption - are Lean and Business Continuity preparedness mutually exclusive?

At its core, lean applies a set of tools to reduce waste: reducing inventories, concentrating supplier relationships, increasing velocity in manufacturing and throughout the supply chain, reducing redundancies and non-value adding steps. The simple answer is maybe… pursued to excess, without a comprehensive understanding of the company’s supply chains and vulnerabilities; unbalanced lean can exacerbate risks of supply chain disruption.

Well executed lean is not a black or white undertaking… the human analogy is interesting – neither obesity nor emaciation translates to a healthy condition.

Our experience with clients confirms that lean is best pursued with measured degrees to yield a fit, agile enterprise - supported with intelligent decisions regarding uncertainties, the needs of its Customers and potential weak links in the supply chain.

We commonly witness a balanced approach to lean accommodating only local uncertainties: forecasts, production downtime. Uncertainties attributed to remote, macro events are often overlooked.

Lean attacks avoidable waste. Costs and compromises associated with consciously developed safeguards (safety stock, alternate suppliers, alternate carriers and modes, redundancies) might also be considered wasteful in the strictest definitions, but may not be avoidable in light of a prudent business continuity plan. APICS (The Association For Operations Management) studies suggest that only 30% of organizations have a full understanding of their end-to-end supply chains, and fewer than 20% can map out their supply chains. The majority of companies are ill-prepared to understand and manage downside risks in balance with the gains to be realized with lean.

Enhanced agility is nurtured and essential in a lean enterprise: improved speed to market, flexibility with demand changes, problem solving skills, alignment with suppliers. These tools, although applied primarily in the normal course of day-to-day business, are vital in the event of supply chain disruption. This aspect of lean is cited as a key factor in the rapid recovery at Toyota, recently restoring its lead among global automobile manufacturers in 2012, following the bruising trifecta of the great recession, unprecedented quality problems and the Japanese tsunami.

We have found that business continuity and lean, approached in balance, can be mutually inclusive and complementary. A key success factor in achieving effective lean performance in light of supply chain vulnerabilities is differentiating avoidable versus necessary waste to provide reasonable assurance against disruption – supported with facts, data and analysis.

Are you prepared?

Although there is an abundance of published material providing basic guidelines and roadmaps for supply chain risk management, the path can be complex.

Although redundancies in the supply chain may elevate short term costs, they are often a necessary part of the solution in providing insurance against disruption, such as:

• Dual sourcing
• Duplicate tooling and specialized production equipment
• Remote safety stock
• Overlapping DC coverage
• Multiple carriers, ports or modes

We have found that a comprehensive supply chain strategy assessment is required to not only optimize your transportation and delivery, but identify gaps and determine redundant paths to provide immediate pre-planned actions, when disruptions occur. This assessment includes network modeling tools, supplemented with analyses outside of these tools, to navigate the cost, benefit and optimization of redundancies and inventory placement with supply chain risk management.

Conclusion

While trends in sourcing and distribution have led to heightened reliance on robust supply chains, major disruptive events have exposed weaknesses for many businesses. Business Continuity Planning, supported with judicious redundancies, are key to securing your supply chain against disruption and mitigating the impact of crises. Careful analysis of your internal and external supply chain risks and the evaluation of appropriate safeguards will yield the most cost effective solution for your unique supply chain risk management needs.

We have worked with Customers in extending the full understanding of their supply chain, and its vulnerabilities. We have applied proven network modeling tools to drive prudent decisions on dual sourcing, operational and distribution redundancies, and inventory safeguards.