Where do you start with risk management in the supply chain ecosystem, where do you stop? Looking at your own supply chains is not really enough.
The turmoil of the last few months in the global supply chain networks, caused by Covid-19, accidents in production plants, freighter disasters and natural catastrophes have once again made it clear that the globally supply chain networks react like an ecosystem. All parts are in balance with each other.
A sack of rice falling over in China can disturb supply chains. This could be a solution.
Because of a pandemic, demand is expected to collapse, customers cancel orders and manufacturers adjust production capacities downwards or sell their capacities to new markets. If demand comes back, possibly with real momentum, manufacturing capacities cannot be ramped up fast enough and demand cannot be met. Even before the suppliers have made up for the backlogs, loading capacities collapse in some large ports. Ships are loaded with delay and block the quays for other ships. As a result, more and more freighters are late and material availability declines even further. Due to the delayed ships, containers are slowly becoming scarce, so that many ports and forwarders have to reduce their loading capacity and suddenly all markets and all goods are struggling with product availability.
Continued lack of product availability is causing purchasing departments to look for new suppliers and order excess quantities. The over-ordering increases the shortages even more.
The bullwhip effect is in full swing, because even in our supply chains everything is connected to everything else and so the sack of rice that falls over in China may well change the supply chains of the world! Where do you start in supply chain risk management and where do you stop? Looking at your own supply chain is not really enough, but you cannot prepare for all eventualities of world affairs!
What we can all do, however, and what we all must do, is to introduce more security of supply into our inventory levels across the board. Properly calculated safety stocks, which are then actually built up, can do much to dampen increasing demand effects and delayed material deliveries. Just as insurance must be obtained before it is needed, safety stocks must be built up and maintained during the times when they are not yet needed.
Risk management in the supply chain ecosystem
In practice, according to my experience, this is often lacking. Safety stocks are estimated or set by gut feeling and are then not built up in many cases. Of course, safety stocks cannot bridge an 18-month pandemic. But they represent those 20% of supply chain risk management that hedge 80% of the risks.