Two approaches to mitigating supply chain risk

Over the last couple of years we've heard many stories about businesses seeking to compress their supply chains and reduce risk by bringing sourcing and manufacturing closer to home. Other stories, including some that we have published, have looked at ways to minimize the risk inherent in supply chains that span vast geographies, including volatile regions of the world.

Recent violence in Ukraine and, looking a bit further back, the tsunami and floods that caused so much human tragedy and business disruption in Japan and Thailand, offer pressing reminders of the risks inherent in globalization and, conversely, in concentrating sourcing in small geographies. In each of those cases, the human cost is the most crucial concern, but the business costs are very real as well. Ukraine may not be a major supplier to Western businesses, but Russian threats to curtail the flow of its abundant fossil fuels through that country have left much of Europe very nervous. Japan and Thailand don't get as much press as they once did, but their businesses remain major suppliers to some of our most significant industries. Major disruptive events in places like those shake up businesses everywhere.

In a recent white paper from the Global Supply Chain Institute at the University of Tennessee, authors Ted Stank, Mike Burnette, and Paul Dittmann examined why so many globalization efforts have faltered. They conclude that companies that focused on cutting costs often overlooked many of the potential risks inherent in lengthy, complex supply chains. The authors believe that as more companies come to recognize those risks, we are likely to see a further expansion of regional procurement and manufacturing centers—a conclusion closely related to one developed by Professor Yossi Sheffi of the Massachusetts Institute of Technology (MIT) in his 2012 book Logistics Clusters.

Global supply chains aren't going away, of course. When well run, they offer too many advantages in terms of both cost and quality. What companies with global supply chains have learned is that they need better ways to evaluate all the real risks involved. But tools to help executives do just that have only recently become available. In the Dialogue interview that appears in this issue, Louis R. Ferretti of IBM's Integrated Supply Chain business unit says that he was surprised at the lack of such tools when he began looking at supplier risk assessment some years ago. As a result, IBM decided to develop its own.

The UT white paper describes another method: applying the EPIC (Economic, Political, Infrastructure, and Competence) framework, which is designed to help supply chain managers assess risk in regions where they are considering doing business.

Many companies rushed into globalization with unwarranted optimism, and they have learned some hard lessons. Regional supply chain networks and new tools for evaluating risk will help improve supply chain performance. Those that adopt such tools will be better prepared to manage the as yet unknown risks that may lie ahead.