"You have to be very rich or very poor to live without a trade." (1)
WITH THE evolution of technology and society, we have seen a drastic change in the movement of goods and resources between countries. We have advanced from the days of trading silk and spices via ancient land routes to a global system that sends raw materials and finished goods across the world by land, sea and air.
Components are shipped from the point of manufacture to the point of assembly and then to the point of sale. A perfect example of this evolution is the auto manufacturing industry. The Ford F150, often considered a symbol of the American truck, while assembled in Illinois, is largely composed of component parts manufactured in Mexico and China.
The importance of maintaining the safety and predictability of supply routes is not limited to component parts, but includes commodities such as wheat or fruit. The United Kingdom imports 90% of its fruit and 60% of its vegetables. As a result, supermarkets were in danger of running out of these commodities during the height of the volcanic ash cloud that interfered with flights during the summer of 2010.
Arguably the greatest strength of this global economy, the relative ease in moving parts and commodities, is the basis for its greatest weakness--the fragility of the system and the concurrent susceptibility to interruption. This dichotomy was noted by the recently created National Strategy For Global
Supply Chain Security, an articulation of the United States' policy to strengthen the global supply chain. This January 2012 report noted that the global system relies upon an interconnected web of transportation and infrastructure: "[W]hile these inter-dependencies promote economic activity they also serve to propagate risk across a wide geographic area or industry that arises from a local or regional disruption." (2) This article presents the advantages and weaknesses of the modern global supply chain and explores ways for participants in the global economy to minimize or transfer risks resulting from interruptions in the supply chain.
Part I considers the modern global supply system and analyzes potential points of vulnerability. Understanding the evolution of this modern system and its points of vulnerability are key to mitigating risks along the supply chain. Part II analyzes the need for a participant in the supply chain to assess its susceptibility to losses caused by trade disruption and considers what contingencies should be addressed. Part III addresses how a company can shift the risks of losses due to supply chain disruptions to third parties. Developing strategies for transferring risks or liabilities is critical in limiting a company's exposure and losses that can occur when its supply chain is interrupted or broken.
The Modern Global Supply System
It's a Small World After All
Over the past 50 years we have witnessed the growth of the globalized economy. Global trade has become a precondition to sustained profits as opposed to an economic advantage available to only a certain segment of companies. Conceivably, the global economy has reached a tipping point that renders it unlikely that we will ever see a retraction in the growth and/or reliance on the global supply chain system. Today, more and more companies must manage their global supply chain in order to stay competitive in this new market place.
Global supply chain is loosely defined as an international network of companies that cooperate to convert ideas into goods or services for customers. (3) Partners in this chain must efficiently exchange information as raw materials are transformed to finished goods while traveling through the network's physical infrastructure. Physical facilities include manufacturers' warehouses, wholesalers' distribution centers, retail chains' warehouses, and retail outlets. (4)
Proper management of a company's global supply chain is key to maximizing profits and limiting losses caused by a disruption. While outsourcing may lead to cost savings, there is a litany of dangers and challenges that must be managed in order to maintain production.
A company must organize its supply chain management structure to support its overall business strategy and design a system to motivate behaviors that optimize performance for the company as a whole. Failing to understand the costs of importing goods from foreign locations can lead a company to make a decision that serves to increase costs rather than save money. (6) This internal structure must be able to handle all required supply chain issues flexibly and responsively. If unable to manage the supply chain in the absence of a specific peril, a company will not reap the benefits of cheaper labor or components residing in other markets. Determining an internal structure for managing supply chain is a first step in safeguarding against losses caused by its interruption.
In managing supply chain, companies may choose a traditional approach and view supply chain management as a subset of a larger department or divide management amongst various departments, such as "Purchasing" or "Operations." (7) Such a hierarchy may look akin to:
Alternatively, companies may consolidate supply chain management, wrapping various other departments under this umbrella. In a sense, links in a supply chain could be viewed as "departments" and individuals that are responsible for executing each department core process. (9) Again, such a hierarchy may look like:
With the resulting complexity of the global economy, companies will shift to the more unified approach with one supply chain manager overseeing the supply chain, incorporating departments such as purchasing, order fulfillment and manufacturing. Such an arrangement would increase a company's flexibility and responsiveness in managing its supply chain.
Only as Strong as the Weakest Link
There is no shortage of threats to a company's supply chain, and these threats will be compounded by the increased scope of the chain. As the concept and real-world application of the global supply chain remains fluid, so does the concept and real-world effects of various threats. To mitigate potential threats to its supply chain, companies should develop a framework defining and characterizing the different perils that may exist to interrupt or break the supply chain.
To better define potential threats that exist, commentators have created an archetype to categorize threats that may arise as either "internal" or "external" pressures. The common link among the perils is that each has the potential to disrupt the supply chain. (11) "Internal" pressures include:
* Processes: Proper execution of administrative and/or managerial processes undertaken by the company. These processes include internal assets and infrastructure, such as communication systems, responsiveness of departments and leadership structure. If the internal infrastructure of the company fails to operate efficiently, supply chain disruptions may occur. (12)
* Controls: The assumptions, rules, systems, and procedures that dictate how a company exerts control over the processes. For supply chain management, this could include order quantities, batch sizes, stock policies, and return policies. Control risk arises from the application or misapplication of internal controls. (13)
* Mitigation: It is essential for a company to plan for contingencies that may occur. The failure to prepare a plan to mitigate losses from an interruption in supply chain is a risk in and of itself. (14)
* Supply Chain Confidence: Different departments such as sales, customer service or operations view the viability of a supply chain differently. As a result, sales persons may order more than is required, or hold stock to avoid a shortage due to a lack of confidence in the chain. Operations may be unable to derive patterns on sales or trends, layering the existing inefficiencies. (15)
* Inability to Measure Demand: Forecasting demand is important to quantifying units produced and shipped. The inability to properly assess demand or respond to a change creates inefficiencies that can disrupt the supply chain and result of economic losses. This has been characterized as the bullwhip effect, when demand information becomes distorted as it is transmitted up the demand chain. This can lead to excessive inventories, higher operational costs and lower customer service. (16)
A company's internal infrastructure must be geared toward efficiently managing its supply chain. Interruptions potentially caused by internal risks are within the control of the company and, although complex, can be assessed, amended and improved upon. These risks are not likely to cause significant economic losses, result in litigation or be the types of risks that a company would transfer to a third party.
External risks, those risks outside the control of the company, can have a significant impact on the supply chain and cause significant economic losses. It is not difficult to consider the myriad of external risks that could interrupt a supply chain. Political instability, natural disasters, dock strikes, cyber attacks, and terrorism all could have a devastating effect on supply chains across the world, with dire impacts to companies. External risks are categorized as:
* Demand Risk: Potential or actual disturbances to the flow of product, information, and cash emanating from within the network between the focal firm and the market. (17)
* Supply Risk: Actual or potential disturbance of the flow of product or information emanating within the network, upstream to the focal firm. (18)
* Geo-political Risk: Natural and/or political risks that can occur. This category includes events such as natural disasters and political upheaval. This risk can impact the firm directly or through suppliers and customers.
The final category is the most...