Want to minimize supply chain risks? Become a disturbance maker.
This is an editorial written by Suzie Petrusic, Research Director in the Gartner Supply Chain Practice. Opinions are those of the authors.
In recent years, supply chain managers have seen three major changes in the risk environment surrounding their supply chain operations:
- The global pervasiveness of risk.
- The constant presence of risk.
- The increased costs incurred to manage the risk.
The main risks stem from trade wars and intense global weather events, such as fires on the west coast of the United States, major floods in China and droughts in Asia. Reinsurance data shows that the average cost of natural catastrophes has increased 2.4 times since the mid-2000s.
Supply chain executives reported an average 4% increase in service costs after each unusual disruption, according to Gartner’s 2020 Supply Chain Signature Series Risk Survey. This may seem like a permanent increase in costs, given the frequency of the risks.
In this environment, supply chain leaders are reassessing their risk strategies. Most organizations have focused on improving their responses to disruption through agility, resilience, and visibility to reduce the impact of disruptions after they have occurred. And Gartner data shows that, done right, it can reduce the impact of any disruption.
But the current increase in the disturbance rate is overwhelming this response-oriented strategy. The supply chain does not have time to return to a sufficient level of preparedness before another disruption occurs.
Shaping the disruption
Many, if not all, supply chains have already been forced to return to a reactive and unprepared response to disruption, despite their investments in visibility, resilience and agility.
But large companies recognize that they also need to develop a strategy to break out of this vicious cycle of continuous disruption and reduce the overall rate of disruption.
Gartner compared top organizations with others to find out how they differed. Our analysis showed two important results:
- Organizations can reduce the rate of disruption to their supply chains, which most supply chain managers even see as a possibility.
- Organizations can strategically determine the risk events that will disrupt them, thereby reducing the number of disruptions they experience.
We call organizations that strategically shape their risk events “disruption shapers”. These companies experience less than a third of disruption from their response-oriented peers. That’s a difference of seven unknown disturbances per year.
Disruption shapers are very different from their peers when it comes to the movement of the physical footprint, including processes, sales channels, order touchpoints, and the countries and locations that inventory passes through. They have fewer third-party vendors, shipping methods, routes, and greater distances between locations.
On average, disruptors have fewer suppliers and manufacturing sites. Because they have smaller areas, they experience less disturbance than their peers.
And they have a different mindset. They realize that while they can’t control the number of risky events generated by the environment, they can control how big of a target they want their organizations to be.
Awareness and optimization
One of the tactics for shaping disruption is to integrate awareness of the higher rate of disruption into their overall supply chain strategy, giving it the same weight as cost, quality, or speed. In doing so, they ensure that the strategic business objectives of the supply chain are preserved.
For example, they are redefining cost optimization and leveraging innovation by adding constant disruption to their decision-making processes.
The other tactic is to reduce the area of their supply chains. They optimize travel and the physical footprint, balancing exposure to a single catastrophic event with exposure to the risky environment.
The disruption shaping strategy benefits organizations by reducing the costs of disruption to the supply chain. It also helps leverage visibility, resiliency, and agility to reduce the impact of disruptions when they occur.
The disruptive shapers are ready and waiting to serve the customers their closest competitors are losing.
By reducing the number of disruptions, the supply chain can return to the full recovery needed for the response-driven strategy to work better.
It’s important to consider that supply chains need to factor the real costs of risk at this higher rate into their business cases for the budget, replacing traditional what-if analyzes with real historical risk data.
CSCO must also strategically approach their partner companies for cooperation, encouraging them to consider service risk in decisions that influence supply chain design. Leaders need to consider not only the needs of the supply chain, but also consider and address the concerns of their partners about a disruptive strategy.
But the ultimate advantage, arguably, is the competitive advantage created. Disruptors are ready and waiting to serve customers who are losing their closest competitors, because those competitors are literally too busy reacting to risk.
This story first appeared in our Operations Weekly newsletter. Register here.