Jess Dankert, VP of Supply Chain at the Retail Industry Leaders Association recently said; “The story of supply chain is, something happens and you need to adapt.” Firms that are prepared to react to disruptions are more successful. This blog post explains the importance of stress testing your supply chain to identify those potential disruptions, what stress testing looks like, and how to begin. RCSG stands ready to assist you and your firm with the tools and experience needed to guide you and your team with your supply chain needs and build a more resilient supply chain.
As early as February 2020, Fortune Magazine reported that 94% of Fortune 1000 companies were experiencing disruptions to their supply chains due to the coronavirus. While the pandemic has caused substantial impacts across many parts of our economy, recent history suggests that the severity and frequency of many different supply chain disruptions are increasing.
In Figure 1 below, I have outlined a number of disruptions in the past twenty years. Given the enormous impact the coronavirus has had on our daily lives and the growing frequency of all these impacts on our ever evolving supply chains, building improved supply chain resilience is perhaps the hottest topic in the industry right now.
The Council of Supply Chain Management Professionals states that logistics is, “part of the supply chain process that plans, implements and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customer’s requirements.”
Merely having one supplier for a key product, component, or service is not automatically a big risk, but companies need to understand which producers/partners might be exposed to disruptions and create plans to address and minimize how those disruptions impact the flow of materials and goods from origin to the final consumer.
External factors like tax laws, tariffs, natural disasters, domestic crises, general strikes, and regional instabilities can bring significant disruption to the supply chain. Due diligence is crucial for all supply chain stakeholders to minimize the disruption that might arise from these events.
So how to start?
Begin by mapping the layers of suppliers, manufacturing plants, distributors, and your logistics network, and then applying a stress test to evaluate the ability to recover from the disruption. This is like the stress tests the US government and European Union instituted after the 2008 financial crisis. As you introduce a disruption your analysis measures two distinct elements; Time to Recover (TTR) and Time to Survive (TTS).
Time to Recover is a measure of the time it would take for the node in the supply chain to be restored to full functionality after the disruption. Examples might be a bridge collapse, a port work stoppage, or snowstorm. When we measure “full functionality”, we mean a return to the same volume of movement, not necessarily the reconstruction of the bridge or the end of the work stoppage. In the bridge example, we might identify an alternate route, or a new mode of transportation.
The second element of measurement is Time to Survive. This is the measure of the maximum duration that the supply chain can match supply with demand after disruption. This in most cases is a measure of the number of days in your different inventory nodes before you must stop production or fulfillment activities.
With simulation modeling and data analytics, you can quantify each measure under different scenarios and then gauge your firm’s ability to recover from a disaster or other external disruption. If the TTR for a given node of your supply chain is greater than the TTS, the supply chain could fail and with it your firm’s ability to match supply and demand. Once you identify these bottlenecks you must then follow-up within your organization developing various mitigation strategies, which might include adding manufacturing capabilities or suppliers, new technology investments, and creating safety stocks.
The process is iterative, as each mitigation strategy is implemented, this exercise begins again to identify other bottlenecks. Identifying, re-evaluating, repairing, and constant stress testing is an important, but often overlooked, part of supply chain management. Your supply chain may look great on paper or in a business process diagram, but at what point, and under what circumstances, will it break down and how will you and your firm react.