A framework for reducing disaster risks in supply chains.

• Author: Silva, Juliano
• Position: Report

1. INTRODUCTION

   There are two broad categories of risk affecting supply chain design and management: risk arising from the problem of coordinating supply and demand, and risks arising from disruptions to normal activities. This paper is concerned with the second category and more specific to disasters that affect supply chain such as natural catastrophes, terrorism attack, fires, power outage and strikes. Studies showed that 73% of U.S companies with more than $1 billion in sales suffered at least one disruption in their supply chain within the past five years and one of the most frequent disruptions includes problems associated with natural disaster. That being said, this paper will first discuss these supply chain disasters and then explore how they affect business. Finally, it will propose what might be done to avoid or at very least mitigate risk of breakdown in supply chains.

2. REASONS THAT MAGNIFY SUPPLY CHAIN EXPOSURE TO DISRUPTIONS

   Although terrorist threats and natural disasters have heightened awareness regarding supply chain, security managers still underestimate supply chain vulnerability and struggle with where to focus their security efforts.

   Disruption to supply chains can seriously disrupt business and cause severe damage to facilities, assets and inventory. Table 1 shows that among insurance claims for catastrophic losses over the past 20 years, hurricanes and tropical storms accounted for the largest share, at 35 percent. The sequence of major hurricanes of 2005 has caused many companies to redefine "disaster preparedness". Total losses from three Category 5 storms alone reached $122 billion, $100 billion of which was just from Katrina. The Insurance Information Institute statistics show that, when such events take place, two out of every five businesses, or 40 percent, go under within five years of the incident. Many of those business failures might have been avoided with the proper level of disaster planning in advance of the event.

   The continuous quest to improve supply chain efficiency and reduce its cost has increased the risk of breakdowns. The lean practices increasingly adopted by many companies to become more efficient are in fact increasing the risk of supply chain disruptiononce these practices eliminate redundancies that provide backup capabilities. Hofmann and Greenwald (2005) suggested that the current prevailing business philosophy that demands progressive leaning out of inventories across the supply chain with an absolute minimum number of suppliers has increased the exposure and/or risk of supply chain breakdown in the event of a disaster affecting one of its members. For Klie (2006), supply chain needs more redundancies to remain efficient in the event of a major catastrophe; even if it means that some of them may become slower as a result. Bartholomew (2006) stated that supply chains are getting leaner and thus there is less ability for supply chains to react in case of a disaster.

   In addition to the lean philosophy the global configuration of the supply chain increases the likelihood of supply chain disruptions. The global outsourcing of non-core processes such as production, logistics, and information services has made the supply chains longer, slower to react and consequently more prone to disruption. Tang (2005) points out that supply chainsare becoming more vulnerable because the disruption risk is not being well managed by the great majority of companies. Although most companies recognize the importance of risk, they fail in an attempt to implement the necessary measures to mitigate these risks due to the capital constraints and also because firms suffer pressure for positive financial results and short term return. Another key factor is that good estimates of the probability of the occurrence of any particular disruption and accurate measure of potential impact of disasters are difficult to obtain and it makes it difficult for firms to perform cost versus benefit analysis or return on investment analysis to justify certain risk reduction programs or contingency plans. In addition, firms tend to underestimate disruption risk in the absence of accurate supply chain risk assessment.

   In addition to all the factors mentioned previously, Tang (2005) suggests that wide product variety also plays an important role in increasing vulnerability in supply chain. Although product variety has proved to be an effective strategy to help firms gain market share, product variety can increase the complexity of supply chain and magnify uncertainty in demand. With more suppliers and items to manage to meet the...