Categorized | Digi-Key

Guest Blog: Don’t ride a black swan

BY STEVE VECCHIARELLI, VICE PRESIDENT, SUPPLY CHAIN SOLUTIONS, DIGI-KEY

Today’s technological economy leverages the distributed supply chain to its fullest extent – making full use of specialist service providers and manufacturers wherever possible to reduce capital and operating costs. The systems are tuned to deliver product when its needed but what happens if unanticipated problems come to the fore and things go badly wrong? Will you become the victim of your sector’s black-swan event?

Black-swan events are rare but when they happen they can be catastrophic. These disruptions are hard to predict as their root causes seem to come from nowhere. Political unrest or uprisings, extreme weather conditions, fires and earthquakes can lead to factory shutdowns – and have serious consequences for the downstream supply chain.

Twenty years ago, an explosion and fire at an epoxy production plant in Japan had massive consequences on many of the integrated circuit manufacturers around the world. Unable to source sufficient quantities of the resin, production halted at many packaging plants leaving end-equipment manufacturers scrabbling for component supplies until alternatives could be sourced.

Situations such as the 1993 epoxy-resin shortage qualify as black-swan events for the electronics industry and its downstream supply chain. In the intervening 20 years, there has not been a comparable problem. Other plants have since caught fire, the most recent being at a memory plant in Korea, but had far less severe consequences on the global supply chain. But this does not mean that smaller problems have not had knock-on effects on individual companies – and they could be black-swan events for those organisations if their struggles lead to a later market failure. At best, they may suffer significant margin erosion as downstream customers turn to competitors.

A supply shortage is far from being the only risk. There are risks of corruption in third-party organisations, problems with import or export licences, intellectual property infringement and employment violations that the customer cannot directly control. Despite being out of direct control, disclosures of these issues can cause major reputational harm to customers of wayward suppliers.

Recent surveys by Deloitte and CEB have indicated that senior executives are becoming more concerned about supply-chain risk management. A 2012 survey by CEB found that 50 per cent of procurement executives had felt direct pressure from their CEO to improve supply-chain risk management. A significant number of companies have yet to act. According to Deloitte, 45 per cent of executives surveyed earlier in 2013 said their supply-chain risk-management programmes are only somewhat effective if not ineffective.

The survey of 600 executives found that, despite issues with risk management, they perceive failures to becoming more costly. More than half said supply-chain disruptions have become more expensive over the past three years, with those operating in the technology, industrial and diversified manufacturing sectors more likely than others to see costs rising.

There is much that organisations can do to improve their risk management. Central to the strategy is good communication. Procurement cannot do everything in determining the best long-term supply-chain strategy. For example, in the CEB survey, 78 per cent of compliance professionals, who can spot potential problems with labour relationships or import and export controls, report little or not control over approval of third-party relationships.

Similarly, weak communication lines between sustainability managers and supply-chain managers hinder the development of effective supply-chain risk-management policies.

Modelling is another tool for effective risk management, making it possible for companies to take a step back to see the layout of the forest instead of focusing on the trees immediately in front.

Network models start with the raw materials and end with the customer and allow the supply-chain professional to look at ‘what if’ scenarios. Once you understand what can happen given a certain set of choice, you can determine the best course of action – and the level of information and support you need from third parties in order to make effective decisions.

You may purchase electronic components made by a number of tier-one suppliers that have plants situated in the same geographic region. If a natural disaster, such as a major earthquake, were to sweep through the area, you need to analyse how their operations would be affected and how this would, in turn affect your own operations. It may turn out during this analysis that, even if the suppliers are geographically distributed, their own raw materials are sourced from one area, making their fates more interlinked than initially expected.

As a result, it is critical to evaluate suppliers thoroughly before trading with them. There are several key points you need to know including country of origin and the location where each supplier’s production facilities. You also need to know their shipment and delivery performance: do they have the ability to demonstrate consistent, on-time delivery? What is their approach to physical security, to prevent supplies from being tampered with or damaged by civil unrest? How effective are the internal processes such as manufacturing controls? And what is their record and social and environmental responsibilities? Do they comply with labour laws and waste-disposal legislation?

If you can answer the questions to your satisfaction, you can be more confident of not being caught out by the rare but devastating black-swan event.

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