Like most of my generation, the movie, The Wizard of Oz, represented not only a breakthrough in movie making, but a source of magical entertainment that still has the power to captivate my attention even after seeing it 25 or more times. One of the most beloved characters is the cowardly lion who is clearly risk adverse and draws others into his fear fantasies while chanting, “Lions and Tigers and Bears…” While I doubt that my supply chain cohorts lay awake at night worrying about Lions and Tigers and Bears, I do believe recent world events do breed a legitimate source of concern (Earth Quakes, Fires and Floods).
The recently published 2012 BDO RiskFactor Report for Technology Businesses reported an increase from 81% in 2011 to 88% in 2012 of companies who found that natural disasters and other geo-political issues pose a serious threat to supply chain management and operations. Still I wonder whether the increased concern is actually materializing into meaningful actions.
Most risk mitigation activity has the negative consequence of increasing operating costs so there is delicate balance between how much insurance you can afford without risking a metaphorical foreclosure. Most companies approach risk mitigation through stockpiling key component inventories or building a network of second sources, both of which hit the bottom line rather hard.
In my mind, there is one action that can be taken that costs relatively little but can help to expose serious vulnerabilities and assess the potential risks of a variety of supply chain disruptions. Think in terms of scenario planning capabilities. In my travels and discussions with large multinational companies I’ve been shocked by the number of them which have very limited capabilities in the area of “what-if” analysis. The lack of depth and breadth in their coverage make risk assessments a bit like performing an auto damage estimate using binoculars from a mile away. So let me elaborate a bit on where effective scenario capabilities create value in the Risk Management arena.
First, provided you have access to the supply chain data representing your value chain, a scenario planning capability can help you simulate disruptions and quickly assess the potential ramifications to revenue, margins, and customer satisfaction. Examining the data will expose the degree of risk associated with the current supply chain network and planning rules. Often this data alone can lead to more strategic risk mitigation actions because they can serve as the foundation of a “disaster playbook” that promotes speed in reacting when a real disaster occurs.
Secondly, there is a class of natural and political disaster that often has some degree of warning associated with it. Think in terms of a tropical storm during hurricane season that is headed for a particular area in Puerto Rico or Taiwan. Can you quickly identify what supply sources are at risk and simulate what a disruption of 2 days or 2 months might mean? What if the radius of impact is 25, 50 or 100 miles? This information alone could be instrumental in making informed supply chain allocation decisions in advance of a disaster.
Finally, the scenario capabilities will prove to be critical in a post disaster mode where significant uncertainties exist with regards to the length and severity of the event. Being able to simulate alternatives is a key to making informed decisions to mitigate or minimize the impact on financial and customer service performance.
There are a handful of companies that reacted with unnatural speed to the events in Japan and to the best of my knowledge, scenario planning was a critical factor in their success. In light of the BDO report, I hope more companies come to recognized just how important “what-fi” analysis and scenario planning is to not only dealing with the normal volatility of demand and supply, but the kind introduced by the metaphorical Lions and Tigers and Bears.