Managing Risk To Avoid Supply-Chain Breakdown
- ISSN: 15329194
Natural disasters, labor disputes, terrorism and more mundane risks can seriously disrupt or delay the flow of material, information and cash through an organizations supply chain. It is asserted that how well a company fares against such threats will depend on its level of preparedness, and the type of disruption. Each supply-chain risk - to forecasts, information systems, intellectual property, procurement, inventory and capacity - has its own drivers and effective mitigation strategies. To avoid lost sales, increased costs or both, managers need to tailor proven risk-reduction strategies to their organizations. Managing supply-chain risk is difficult, however. A powerful "what if?" team exercise called "stress testing" to identify potentially weak links in the supply chain is recommended. Armed with this shared understanding, companies can then select the best mitigation strategy: holding "reserves," pooling inventory, using redundant suppliers, balancing capacity and inventory, implementing robust backup and recovery systems, adjusting pricing and incentives, bringing or keeping production in-house, and using Continuous Replenishment Programs, Collaborative Planning, Forecasting and Replenishment and other supply-chain initiatives.
Managing Risk To Avoid Supply-Cha...
FA L L 2 0 0 4 V O L . 4 6 N O. 1
R E P R I N T N U M B E R 4 6 1 0 9
Sunil Chopra and ManMohan S. Sodhi
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n March 17, 2000, lightning hit a power line in Albu-
querque, New Mexico. The strike caused a massive surge in the
surrounding electrical grid, which in turn started a fire at a
local plant owned by Royal Philips Electronics, N.V., damaging
millions of microchips. Scandinavian mobile-phone manufac-
turer Nokia Corp., a major customer of the plant, almost
immediately began switching its chip orders to other Philips
plants, as well as to other Japanese and American suppliers.
Thanks to its multiple-supplier strategy and responsiveness,
Nokia’s production suffered little during the crisis.
In contrast, Telefon AB L.M. Ericsson, another mobile-
phone customer of the Philips plant, employed a single-
sourcing policy. As a result, when the Philips plant shut down
after the fire, Ericsson had no other source of microchips,
which disrupted production for months. Ultimately, Ericsson
lost $400 million in sales.1 (Ericsson has since implemented
new processes and tools for preventing such scenarios.2)
These two dramatically different outcomes from one event
demonstrate the importance of proactively managing supply-
chain risk. Supply-chain problems result from natural disasters,
labor disputes, supplier bankruptcy, acts of war and terrorism,
and other causes. They can seriously disrupt or delay material,
information and cash flows, any of which can damage sales,
increase costs — or both. Broadly categorized, potential supply-
chain risks include delays, disruptions, forecast inaccuracies, systems breakdowns, intellec-
tual property breaches, procurement failures, inventory problems and capacity issues. Each
category has its own drivers (see “Supply-Chain Risks and Their Drivers,” p. 54) and miti-
gation strategies (see “Assessing the Impact of Various Mitigation Strategies,” p. 55).
How a company fares against such threats depends on the type of disruption and the
organization’s level of preparedness. To prevent the kind of heavy sales losses suffered by
Ericsson after the Philips plant fire, managers must perform a delicate balancing act to
keep inventory, capacity and other elements at appropriate levels across the entire sup-
ply chain in a dynamic, fast-changing environment. Dell, Toyota, Motorola and other
leading manufacturers excel at identifying risks to their supply chains, and at creating
powerful mitigation strategies that neutralize potentially negative effects. With a clear
Managing Risk To Avoid
Sunil Chopra is IBM Distinguished Professor of Operations Management and Information Sys-
tems at the Kellogg School of Management. Contact him at firstname.lastname@example.org.
ManMohan S. Sodhi is associate professor of operations management at Cass Business School
in London. Contact him at email@example.com.
By understanding the
variety and interconnect-
edness of supply-chain
risks, managers can tailor
balanced, effective risk-
reduction strategies for
Sunil Chopra and
ManMohan S. Sodhi