The most serious Risk that Companies with extended supply chains face is – the Shortage Risk. In the wake of the Japanese earthquake and tsunami[i], the floods in Thailand and a fire that took significant capacity of a critical automotive industry resin offline[ii] – ‘major supply shocks’ have taken center stage. But these are only a small subset of the Shortage risks that Companies and their Supply Chains face.
Often, the more mundane, ‘garden variety’ shortages that Companies face on a daily basis, can pack a vicious punch – making a serious dent in a company’s competitiveness, if not pushing it off the cliff!
Let’s understand why Shortages are the biggest risk now and examine potential warning signs that shortages maybe just around the corner.
The Destructive Impact of Shortages: For the want of a nail..
Shortages impact all companies downstream of the manufacturer facing shortages – to varying degrees. Sometimes, shortages can cut across industries.
For example, if Amazon buys up significant capacity of TFT glass (a specialized LCD used in different products) for its next new Kindle launch, that can cause shortages in unrelated industries – such as at video-game makers or electronic-toy makers. Even, the most agile Operations executives can get blindsided in such cases.
The impact of shortages can be severe. Dynamic young companies trying to ship products, stand to lose a lot. But even larger companies are not immune (Smartphone Biz Hurt by Own Success as Chip Supply Shrinks [iii]). Beyond the obvious Revenue impact, shortages can:
– turn away new customers (revenue hit),
– put-off existing customers (satisfaction erodes, loyalty and customer lifecycle value diminishes),
– cause unintended consequences (long lead-time for large companies downstream or an entire industry[iv])
– worse (perception of poor management controls, even if incorrect, adverse competitive impact[v])
Any one of these is bad enough. Their compounding effect can be devastating.
Avoid getting Blindsided – Warning Signs
At a time of such a tepid recovery, leadership across companies of all sizes should take note of this threat and ask – What are the warning signs that we are exposed? Here are a few critical ones we have found helpful:
1) Frequent over-forecasting by Channel partners and Field Sales – Manufacturing Operations team frequently asked to jump through hoops to increase shipment quantities at short notice, often to find later that forecasts were lowered.
2) Dependence on very few suppliers – OEMs totally dependent on few Contract Manufacturers (in the Hi-tech electronics industry) or Tier1 suppliers (in the Auto industry) who are also major suppliers for other competitors. BOMs with a high percentage of single-sourced items should also throw up red flags.
3) Visibility limited to key suppliers in the first tier of supply only– For an OEM this means having the ability to manage and monitor the performance of direct suppliers only, in the best case (CM/ODMs or Tier1 Suppliers [vii]), and no visibility beyond that[vi].
4) Frequent Allocations sometimes even on ‘run rate’ products – For products that start approaching stable sales patterns, alarms should go off if shortages occur, before these products go on hard ‘allocation’.
5) Quarterly Business Reviews (QBR) with suppliers showing ‘strain’ or going ‘too smoothly’– If QBRs with Supply Chain partners start showing strains due to unplanned costs,etc.– that’s an early warning. Dangers may also be lurking, if no disagreements arise.
6) Total time to respond to demand changes is unknown or too long – When it takes too long to answer – “How long will it take to ship a 10% upside?” or the range is too wide (“a few hours to a few days”) – that’s a red flag.
There are exceptions to the above. However, time and again, across different companies and industries we have found the above provide a good check-list to harden Supply Chain processes and systems against shortages.
Have you been part of a recent ‘shortage event? Did you see any other warning signs? Other Supply Chain risks that are bigger?
[i] Japan and the global supply chain: Broken links; The Economist; March 31st, 2011
[ii] German Chemical Plant Fire Threatens Auto Backlog; April 23, 2012
via NPR, http://n.pr/Jjco6q
[iii] Smartphone Biz Hurt by Own Success as Chip Supply Shrinks; King, Satariano and Culpan – May 14, 2012
http://www.bloomberg.com/news/2012-05-15/smartphone-biz-hurt-by-own-success-as-chip-supply-shrinks.html?cmpid=yhoo
[iv] Automakers Avoid Crisis After Scramble For Resin; Fri, 04/27/2012, AP
http://bit.ly/auto-resin-supply-shortage-2
[v] Report: UMC benefits from TSMC 28-nm supply shortage; May 17, 2012
http://www.eetimes.com/electronics-news/4373239/UMC-benefits-from-TSMC-28-nm-shortages
[vi] Don’t let your Supply Chain Control Your Business; Choi & Linton; HBR, Dec. 2011
http://hbr.org/2011/12/dont-let-your-supply-chain-control-your-business/ar/1
[vii] Case Study – Accelerating Demand Responsiveness while facing Uncertainty and Growth
http://www.zyom.com/Education/CaseStudyindex.php
respond2demand - Zyom Blog 
Feedback from Dr. Chaman Jain of St. Johns University & Responses by Rakesh
Thanks Dr. Jain
——-
From: Chaman Jain
To: Rakesh Sharma
Subject: RE: New Blog entry – regarding Biggest Risk in Supply Chains today & your thoughts
Dear Rakesh
I found your blog quite interesting particularly warning signs. But a few of them are not clear to my mind:
1. It is not clear to me how over-forecasting by channels partners and field sales and under-forecasting by those who have the final say can be construed as a signal for shortages? To me, this is normal.
Rakesh response>> consistent overforecasting from Sales field,as we found in one case, was construed as a ‘biased signal’, and therefore was ignored by Operations – who are eventually held accountable for Shortages on the one-hand and ensuring inventory costs (for excess/obsolete) are kept in check. In one case, we found this resulted in ‘lack of suitable response’ when the forecast really had to be moved up. Thats when phone calls and emails start increasing between Sales and Ops – but without the desirable outcome – i.e., getting to a better demand signal.
2. Not sure how key suppliers make their supply situation visible to their customers.
Rakesh response>> thats an area where build-collaboration systems can help. Ruckus Wireless has been using such a system (from Zyom) to ensure they get the best ‘up-to-date’ signals of where the suppliers stand.
3. Not sure how product sales that have stabilized can be construed that shortage is in the horizon. To me, they have become matured products.
Rakesh response>> Agree. The point here was that if such ‘mature products’ face shortages, then surely that is an early sign that something is amiss in the supply chain. It could be that one of the parts being used in the ‘mature product’ has an industry-wide allocation (shortage) so a product change maybe required to remedy the situation. There could be other reasons too. Sum total of all this – shortages on ‘mature products’ need to be investigated and root causes identified before it becomes something worse.
4. Not sure how QBR exhibits strain.
Rakesh response>> QBRs in which Suppliers/CMs indicate that the OEM has been changing the ‘build signal’ too often without giving them enough time to respond. QBRs in which the issue of expediting or other costs come up because of this – cause ‘strain’ among the 2 parties. It is a positive often times since this could be an early warning that the processes to communicate signals between the two parties are not working well.
Chaman
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Comments from IBF (International Business Forecasting & Planning) LinkedIn Group:
by Raymond Allen:
I disagree Rakesh, to me the Biggest risk to supply chain is Assumption based analysis.
too often I hear someone somewhere say, oh its no problem, we’ll just add it to safety stock, that’s what we always did… or you assume growth will continue just because it always has… remember everything acts as it always has…until it doesn’t! Always have a fact based reason for what you do, Assumptions will kill your supply chain and cause you to go into react mode instead of planning.
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Rakesh’s response (from IBF LinkedIn Group):
Raymond – good point about assumptions – they can be destructive if not done right.
As in your example – someone says ‘.. just add (the excess) to safety stock..’. That will not work. In this example, it points to the fact that the ‘inventory controls’ are missing – there could be bigger problems.
However, the point being made is more about the current time (2012)- we are at a stage of macro recovery, where ‘Shortages’ are going to be the real killers.. not excess inventory, or other Operational metrics.
Granted – excess will ruin the numbers in the next quarter or too if we had to write off or write-down inventory. However, given the current dynamics, the demand downside risk is smaller(i.e., excess related costs), compared to the Upside risk (i.e., running out of stock, much longer lead-time, etc.) because that means – Lost opportunity (and Revenue). Whether its at an existing customer or new customers/ channels partners – that’s gonna hurt.. right?
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The success of a supply chain depends on how fast the system can meet the demand across the globe.Simultaneously it has to trade off between overstocking and stock-outs.The algorithm has to be alert on these two aspects all the time to bring in a demand responsive system.
The article has brought out the practical aspects, very clearly. All practitioners and management gurus will benefit..
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