Supply chains are the lifeblood of any company. Yet disruptions are an inevitable part of doing business globally. Whether it’s a devastating natural disaster such as 2018’s Hurricane Michael, or political events such as the recent trade wars, it’s a question of when, not if, the next interruption is going to occur.
As the saying goes, we live in a global economy. Global supply chains have extended pipelines and greater complexity, and are therefore more susceptible to disruptions such as natural disasters, supplier issues, and economic and political instability. The larger the footprint of a supply chain, the greater the odds it will face one or more of these adverse events.
The Japanese tsunami of 2011 forced General Motors to close plants in the U.S. due to part shortages from suppliers in Japan. The company had made the costly mistake of not having a good handle on the identity and location of lower-tier suppliers. The cost to GM was reported to be in the millions of dollars. It has since implemented countermeasures, but the event served as a valuable lesson about the importance of taking a holistic approach to supply-chain risk management.
With cyberattacks at an all-time high and terrorism a constant threat, supply-chain risk management is attracting attention not only from global giants, but also from small and mid-sized businesses (SMBs), many of which operate primarily domestic supply chains.
Most companies respond to disruptions by reacting after the fact. Very little offense is deployed. Yet the old adage that “the best defense is a good offense” is a smart approach to effective risk mitigation.
Choosing the best strategy can mean the difference between success and failure.
Make no mistake: risk management must begin at the strategic level. It can allow organizations to gain a competitive advantage over less-adept rivals, by increasing market share when a supply-chain disruption occurs.
That is why many leading organizations are making supply-chain agility a strategic priority. The Supply Chain Operations Reference (SCOR) model is the world’s leading supply-chain framework, linking business processes, performance metrics, practices and people skills into a unified structure. It defines supply-chain agility “as the ability to respond to external influences, [and] the ability to respond to marketplace changes to gain or maintain competitive advantage.”
Agility is one of five SCOR attributes used to prioritize and align supply chain performance with business strategy. Just as one would describe a bank account using standard characteristics such as type of account, balance, and interest rate, a supply chain requires standard identifying characteristics. SCOR uses reliability, responsiveness, agility, cost and asset-management performance attributes to describe a supply-chain strategy.
Apple and Honda are two examples of successful companies with agile supply chains. Automotive insiders credit Honda’s design of factories to produce a variety of models, versus competitors’ approach of dedicating plants to a specific model, with enabling the company to ride out the 2008 recession relatively unscathed.
Imagine participating in Olympic rowing. If just one rower is out of sync, it will adversely impact the entire boat. While supply-chain management isn’t an Olympic event, leading companies such as Amazon, Apple, McDonald’s and Procter & Gamble are successfully using it to gain a competitive advantage.
Supply chains that are out of sync strategically will be misaligned tactically as well. They have a challenging road ahead when it comes to implementing effective risk-management programs. For example, a corporate customer might choose to make agility its top competitive priority for a particular product family. But if key suppliers are competing based primarily on cost, then this mismatch will lead to suboptimal decisions. Suppliers will most likely prioritize their resources and investment decisions in favor of projects that move the needle on cost reduction rather than risk reduction.
Conversely, an aligned supply chain offers significant opportunity to gain competitive advantage for the supply chain as a whole. Everyone is on the same page, and the end-to-end supply chain is tuned to achieve superior performance in agility. In this scenario, key trading partners collaborate and share information such as performance measures and metrics. Risk management becomes an ongoing agenda item throughout the supply-chain network, with appropriate key performance indicators that are measured, monitored and continuously improved.
(Note: For purposes of this discussion, superior performance means ranking in the top 10% of one’s peer group for a particular Level-1 strategic metric, as determined by a competitive supply-chain benchmarking study such as SCORmark. SCOR Level-1 strategic agility metrics include adaptability and overall value at risk.)
This strategic-alignment approach is most applicable to key suppliers, including strategic partners. For commodity-type suppliers, with undifferentiated products such as standard fasteners or corrugated boxes, competing primarily on price is a logical choice, regardless of the corporate customer’s supply-chain strategy.
Many suppliers fall into the SMB category, which is typically characterized by thin management, little or no industrial engineering talent, tight budgets, and a tendency to focus on firefighting. Consequently, SMBs lack the necessary horsepower to independently pursue performance-excellence initiatives such as a supply-chain risk management program.
The Diverse Manufacturing Supply Chain Alliance (DMSCA) is a non-profit membership organization, offering a solution to supplier development and risk management called the Corporate Mentoring Program (CMP). CMP is heavily influenced by the SCOR framework, and is designed to help SMBs improve their competitiveness and climb the ladder toward strategic partnerships with customers.
CMP Supplier Supply Chain Performance Maturity is based on progressive engagement in five implementation phases. Supply Chain Performance Maturity is certified at three levels; Bronze, Silver and Gold. Suppliers who reach the CMP Level 3 Gold certification have received all program education and coaching services, and have demonstrated through live implementation measurable improvements in supply-chain performance.
DMSCA is supported by corporate members such as Johnson & Johnson, Caterpillar, McCormick and Co., Merck, Medtronic, PepsiCo, Owens Corning, and Siemens.
Introducing suppliers to tools, techniques and strategies of which they would otherwise be unaware and unable to maximize on their own is a win-win for both customers and suppliers. First, suppliers learn to become more efficient, which leads to improved bottom-line results. Second, as suppliers build capability, the opportunity to grow the business and prosper increases. Third, working with capable suppliers whose strategies are aligned with the customer reduces supply-chain risk and boosts resiliency.
The bottom line is that a great supply chain is a resilient supply chain, one that can smoothly handle sudden unexpected disruptions. This occurs when supply-chain strategies are in sync.
Jeffrey Miller leads coaching, education and training for DMSCA’s Corporate Mentoring Program (CMP), and is founder and managing principal of Productivity Engineering Services LLC . David J. Burton is the founder and CEO of DMSCA.