This year’s catastrophic events
highlight why you don’t let your client take undue risks
with supply chain interruption.
Before embarking on his trip around the world, Portuguese
explorer Ferdinand Magellan noted, “The task is not to
make sure that the sea is calm, but to prepare oneself to sail
in stormy, unknown waters.” Although Magellan
didn’t make it, his fleet did thanks to its contingency
plans, including Magellan’s untimely death.
Risk managers, like Magellan, face stormy, unknown waters
everyday as they struggle to predict what lies ahead. Some of
those risks are frequent, low impact, predictable and
manageable. Others may be rare but could have devastating
consequences for a firm’s supply chain. Striking the
right balance between risk mitigation and efficiency is an
inexact science at best. Just ask Magellan.
Looking at the first half of 2011, you would think our
planet was the set for one big disaster movie. Earthquakes,
tsunamis, volcanic eruption, floods, a nuclear power plant
meltdown, heat waves and political unrest in the Middle East
resulted in business disruptions far outside the events’
Disasters such as these can cause a cascading effect all
along the supply chain. Consider that the Japanese disaster
shut down manufacturers exporting supplies to waiting
businesses on the other side of the world. Ash from
Iceland’s volcanic eruption grounded 17,000 flights to
and from Europe, costing the airlines more than $200 million a
day. Flooding along the Mississippi River disrupted the United
States’ largest inland shipping route from the Gulf of
Mexico, delaying cargo and natural gas supplies to the rest of
the country. Countless numbers of businesses, small and large,
experienced some disruption as a result.
Risk managers awakening to the fact that these so-called
“Black Swan” events, thought to be rare and
unpredictable, may not be so rare after all. They are finding
the consequences for not preparing for them can do irreparable
damage to the financial health and reputation of a business.
“Black Swan” is a term coined by Nassim Taleb,
author of a best-seller on the subject, to describe rare and
unpredictable occurrences: Think September 11, 2001. The
problem is that Black Swans are becoming more frequent and a
serious threat to supply chains.
Globalization has opened up a world of opportunities to
business, lengthened the supply chain and expanded the choice
of suppliers. Businesses no longer buy locally or from multiple
sources. Suppliers can be spread across the world. As a result,
supply chains are more vulnerable. A Black Swan event anywhere
along the line can disrupt business downstream.
A drive toward eliminating waste and duplication in the
1990s also exposed supply chains to more dangers. To cut costs,
many businesses introduced the “Deming” method of
“just-in-time” inventory, single-source suppliers
and offshore outsourcing for services and manufacturing. In
addition, competition today requires businesses to offer more
frequent new products (think Apple), which require new
An industry study by AMR research in 2006 showed that 42% of
companies use more than five supply chains because they produce
multiple products for multiple markets. The more chains, the
more likely something will go wrong in one of them.
Companies can take the following steps to protect themselves
against these risks to their supply chains. A business has to
carefully weigh the cost and benefits, of course, but in the
long run protecting the supply chain may be a matter of
Have the right insurance
coverage in place. A business interruption policy will cover
certain events but not all. Trade disruption insurance is
designed to protect businesses against disruptions to the
supply chain, regardless of whether there is any physical loss
to their assets.
Have options. If a firm single
sources critical parts and the supplier is on the other side of
the world, then it’s important to have a backup plan in
case the supplier can’t deliver (as was the case
following the Japanese earthquake). Find multiple suppliers,
manufacturing in multiple factories and located in multiple
Consider using standard
components instead of custom-made parts so it’s
easy to find a suitable replacement.