Executive Briefings

Smart Approaches to Risk Management

Recent natural disasters, such as the earthquake and tsunami in Japan, have brought home the reality that companies need to plan for supply chain disruptions lasting months rather than days or weeks, says Tim Feemster of Grubb & Ellis. While such incidents may be rare, extended global supply chains have much greater overall exposure today, he says.

As a result, companies should rethink their use of single-source suppliers and their safety stock policies, Feemster says. The natural tendency after a disaster may be to eliminate all single sourcing, but in some cases a supplier may have a technology that can't be replicated elsewhere, he says. If that is the case, a change in inventory strategy may be needed. "One week of safety stock will no longer be sufficient, but determining how much more is needed will involve executive-level discussions, particularly if the part is very expensive," Feemster says. "A company just has to look at the probability of another disruption and the risk mitigation potential and make those decisions as best it can."

Companies have learned a lot about this process over the past decade, Feemster says, noting that global risk management first came to the fore in 2002, when longshoremen went on strike at West Coast ports. "No containers were allowed in or out of the West Coast for 10 days and the supply chain was interrupted for an extended period beyond that," says Feemster. As a result, most companies today have a four-corner or five-corner strategy, under which they bring containers into the Pacific Northwest, Southern California, and perhaps the Gulf Coast and East Coast, he says. "That's how they have mitigated their risk."

To view video in its entirety, click here

Recent natural disasters, such as the earthquake and tsunami in Japan, have brought home the reality that companies need to plan for supply chain disruptions lasting months rather than days or weeks, says Tim Feemster of Grubb & Ellis. While such incidents may be rare, extended global supply chains have much greater overall exposure today, he says.

As a result, companies should rethink their use of single-source suppliers and their safety stock policies, Feemster says. The natural tendency after a disaster may be to eliminate all single sourcing, but in some cases a supplier may have a technology that can't be replicated elsewhere, he says. If that is the case, a change in inventory strategy may be needed. "One week of safety stock will no longer be sufficient, but determining how much more is needed will involve executive-level discussions, particularly if the part is very expensive," Feemster says. "A company just has to look at the probability of another disruption and the risk mitigation potential and make those decisions as best it can."

Companies have learned a lot about this process over the past decade, Feemster says, noting that global risk management first came to the fore in 2002, when longshoremen went on strike at West Coast ports. "No containers were allowed in or out of the West Coast for 10 days and the supply chain was interrupted for an extended period beyond that," says Feemster. As a result, most companies today have a four-corner or five-corner strategy, under which they bring containers into the Pacific Northwest, Southern California, and perhaps the Gulf Coast and East Coast, he says. "That's how they have mitigated their risk."

To view video in its entirety, click here