Seven key factors short-circuit supply-chain risks

When faced with supply-chain disruptions, companies that have invested in flexibility and risk segmentation are more resilient than peers that haven’t made similar investments, a new report shows.

Companies with mature supply-chain and risk-management capabilities are affected less and recover more quickly from disruptions than companies with immature capabilities, according to a new report from Massachusetts Institute of Technology (MIT) and PwC.

The report cites global automaker Nissan’s recovery from the March 2011 earthquake, tsunami, and nuclear disaster in Japan as a model for the way mature supply-chain and risk-management functions can help a company recover from a disruption.

Six Nissan production facilities and 50 of the company’s critical suppliers suffered severe damage in the disaster, according to the report. But Nissan ended 2011 with a 9.3% rise in production, compared with a 9.3% drop in production across the industry, the report said.

According to the report, Nissan:

• Stayed true to its risk-management philosophy by identifying risks as early as possible, actively analysing risks and rapidly implementing countermeasures.
• Deployed a previously prepared continuous readiness plan that encompassed its suppliers and included an earthquake emergency response plan, business continuity plan and disaster simulation training.
• Empowered management to make decisions locally without lengthy analysis.
• Had a flexible supply-chain model structure and simplified product lines.
• Had visibility across the extended enterprise and good coordination between internal and external business functions.

“Flexibility is critical to a company’s ability to adapt to change,” MIT professor David Simchi-Levi said in a news release. “A greater degree of flexibility in their businesses will allow companies to better respond to demand changes, labour strikes, technology changes, currency volatility, [and] volatile energy and oil prices.”

Seven factors enable stronger capabilities in supply-chain management and risk management, according to the report. These are:

1. Risk governance. Appropriate risk-management structures, processes and culture provide a firm foundation.
2. Flexibility and redundancy. Embedding these qualities in product, network and process architectures can minimise the impact of disruptions while enabling adaptation to change.
3. Alignment between partners in the supply chain. Partners can align strategically on key value dimensions, identification of emerging patterns and advancement toward higher value propositions.
4. Upstream and downstream supply-chain integration. Information sharing, visibility and collaboration with supply-chain partners is a key.
5. Alignment between internal business functions. Companies can align and integrate their value-chain functions on strategic, tactical and operational levels.
6. Complexity management/rationalisation. Companies can standardise and simplify networks and processes, interfaces, product architectures, product portfolios and operating models.
7. Data, models and analytics. Intelligence and analytical capabilities can support supply-chain and risk-management functions.

Three-fifths of the companies participating in the survey said alignment between partners in the supply chain is the most important factor in reducing risks.

Although strategies exist for managing risk in supply chains, global companies also face significant challenges. Survey participants overwhelmingly agreed that over the past three years, dependencies between supply-chain entities have increased (95%); changes in the extended supply-chain network configuration occur more frequently (94%); and new product introductions have been more frequent (87%).

All these factors can lead to increased complexity in the supply chain.

“As companies expand into the global marketplace,” Glen Goldbach, a PwC risk-management director, said in a news release, “they need to adjust their supply chain to meet the increasingly complex requirements of their customers and manage multiple distribution channels.”

—Ken Tysiac (ktysiac@aicpa.org) is a CGMA Magazine senior editor.