Supply chain disruption – how to manage and avoid breakdowns

In the dictionary, disruption is defined as “disturbance or problems that interrupt an event, activity, or process.” So, a supply chain disruption definition is a breakdown in the manufacture flow of goods and their delivery to customers. While the “broken link in a chain” analogy worked in the past, today’s complex supply networks are rarely so straightforward. You might think of supply chain coordination as more like cogs in a machine that need mesh simultaneously. So, disruption makes everything stop at once – the proverbial wrench in the works.  

What is supply chain disruption management?

To manage supply chain disruptions effectively, you must be able to react immediately when adverse events strike your operations. Here are few key steps: 

• Quickly assess critical events
• Identify any risks related to delivery of goods from your suppliers
• Evaluate the viability of your suppliers
• Secure supply, and ensure that you can meet customer commitments

Particularly following the coronavirus outbreak, many enterprises are realizing that it is not enough to optimize the cost of supply chain operations. No matter how finely tuned a machine is, disruption will happen, and the cost of reacting to events is usually many times higher than being ready for them.  

What is supply chain disruption risk?

To clarify a few terms briefly in this context, a threat is an event that could harm your supply network. A risk is the potential for loss or damage resulting from the threat. Using our idiom, the wrench is the threat. The risk is that someone could drop the wrench into the machine. Then the cogs of the machine will stop, and the machine will break down. This causes all kinds of costs, including repairing the machine, lost production time, and so on. Identifying supply chain disruption risk is therefore identifying what could go wrong in your supply network, and the extent of damage when it happens.

So, what are some potential types of supply chain disruption? In some cases, disruption is an internal company matter, such as a machine breakdown, product recalls, or changes in management. Other systemic threats come from external factors such as telecommunications blackout or power outage. Socio-geopolitical threats include regulatory changes, border closures, or riots. And supply chain disruptions due to natural disasters occur regularly.

Supply chains are commonly vulnerable to these six risk categories:

1. Cyber and security (such as ransomware, data theft)
2. Financial and company viability (for example, force majeure, revenue outlook)
3. Geopolitical (such as civil unrest, tariff hikes)
4. Man-made (including fires, explosions)
5. Natural disaster (extreme weather, earthquakes, etc.)
6. Reputational and compliance and (such as conflict of interest, sustainable procurement)

Skyrocketing demand for certain goods during the coronavirus pandemic provided countless examples of supply chain disruption, along with their consequences. Where demand for personal protective equipment and medical devices outpaced supply, hospitals outbid each other, while the public fought for hand sanitizing gel, masks, and pain relievers - along with canned goods, and of course, toilet paper. Similarly, lockdowns and restrictions produced another example of supply chain disruption, when the demand for certain goods plummeted – restaurant meals or automobiles, for example. A sudden drop in demand disrupts supply chains as well, as it can lead to a breakdown in manufacturing cycles.

For a supply chain disruption case study, think of toilet paper early in the COVID-19 crisis. Panic buying and hoarding clearly disrupted supply chains, as paper producers, product makers and retailers scrambled to produce and deliver enough toilet paper to meet unusually high demand. Yet the overall impact of supply chain disruption remained low, despite the public perception.  At times, the sight of empty shelves caused skirmishes between shoppers, but the industry could respond quickly, and most shortages were temporary.

In the first half of 2020, supply chain disruption caused by the coronavirus pandemic have eclipsed other risks. Yet examples for supply chain disruptions caused by the Brexit, trade wars, natural disasters and other threats remain, and are likely to resurface on industry radar relatively soon.

Compounded across industries and economies, the global cost of supply chain disruption resulting from the coronavirus pandemic has been enormous – several trillion dollars so far – and the consequences include a renewed interest in onshoring or near-shoring for critical industries.

Within individual enterprises, the cost of supply chain disruption includes loss of revenue, when products do not reach customers schedule. However, interruption of supply chains and deliveries leads to a range of other costs. For example, when parts are unavailable, productivity is lost as workers sit idle. At the same time, the search for and onboarding alternative suppliers is costly. Further effects of supply chain disruption include damaged reputation, which nudges customers to turn to the competition.

In most cases, the faster you react to events, the better you can manage disruptive supply chain risks. This is one reason why riskmethods artificial intelligence-based software warns you of disruptive events in real time - often before they hit your enterprise. When you monitor risks including suppliers and supply paths, weather forecasts, financial indicators and trade union activity, you learn of threats to your system before calamity strikes. And keeping a close eye on shifting consumer sentiment might just catapult you ahead of your competition should demand spike. What are operational strategies for managing supply chain disruptions? Here are three areas to focus on:

#1 Be aware of supply chain disruption risk and have proactive contingency plans

This can make you flexible enough to quickly adjust your operations when faced with irregularities. Even business continuity plans address emergencies only after they have occurred. Be aware of threats and plan for risk, so you are ready if, or should we say when, an adverse event affects one of your key suppliers.

#2 Develop supply chain disruption strategies

Of course, efforts to improve supply chain cost efficiency often are at loggerheads to risk-management. Procurement professionals need to ensure cost-efficiency. You can protect savings gains by avoiding loss from being unprepared for future risk events – such expenditures are usually many times higher than investing in supply chain risk management – and factoring in the cost of risk. Reexamine any just-in-time policies and consider holding more stock as ways to reduce risk and improve resiliency. Also collaborate with business partners to foster a reliable supply network. Finally, establish whether the greatest dangers lie with suppliers, or if customers are driving disruption.

#3 Avoid supply chain disruption in the first place

In a factory, you usually have spare parts on hand in case your machinery should break down. Similarly, manufacturers also might hold extra inventory, in case their supply network should break down. Go one step beyond identifying threats or risk. Look at vulnerabilities - weaknesses, both inside and outside the organization - and work to strengthen them. Much like looking at the construction plans to understand the inner workings of your machine, the best supply chain disruption solutions might mean going back to the drawing board: 

• Gain sub-tier visibility into your supply network
• Reexamine supplier locations and viability
• Diversify your supply chain where possible
• Use active monitoring of new and emerging threats for all risk categories

We believe that effective supply chain disruption risk management involves identifying potential threats, assessing risks, and mitigating their impact. In our humble opinion, riskmethods is the best solution out there. We provide predictive insight, which helps you avoid disruptions before they occur. Or you can react faster when they do, keeping you one step ahead of your competition. riskmethods now offers a Supply Chain Continuity Program™ that includes a framework for achieving supply chain continuity, coronavirus recovery and becoming a risk-aware enterprise.

Is disruption ever good? Well, it can be. Near the end of the 20th century, the idea of “disruptive” technology was born, with a very positive meaning. It refers to innovation so powerful that shakes up the status quo. Digital disruption allows businesses to take advantage of and create new opportunities, so digitalization can be considered disruptive supply chain technology. And we think using artificial intelligence to help you identify, assess, and mitigate risk is a very good example of positive disruption in supply chain management.