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April 28, 2016

Supply Chain Management (SCM) in Times of Crisis

We published a piece recently discussing supply chain crises and how to anticipate and plan for them. (Missed this post? You can check it out here.) Today we're following up on this topic with specific questions to ask your organization to determine if you're actually equipped to handle a disaster, as well as the leadership skills needed to sufficiently manage and resolve a crisis from start to finish. Let's get started!

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What is Supply Chain Management (SCM)?

Supply chain management (SCM) is the oversight of materials, information, and finances as they move in a process from supplier to manufacturer to wholesaler to retailer to consumer. Supply chain management involves coordinating and integrating these flows both within and among companies (source: TechTarget). Managing a global supply chain may seem relatively straightforward during the calm, but what happens when the storm hits (literally or figuratively)? Can your supply chain actually withstand a crisis?


What Defines a Crisis?

Merriam-Webster defines a crisis as “an unstable or crucial time or state of affairs in which a decisive change is impending; especially: one with the distinct possibility of a highly undesirable outcome.” When it comes to your supply chain, a crisis would be a situation where one or more activities are interrupted, resulting in a major disruption of the normal flow of goods or services.

In the manufacturing and supply chain world, three main types of crisis exist: natural disasters, accidents and labor shortages. You can read more about these categories of crises in our recently published article: How to Anticipate and Survive a Supply Chain Disaster. While crises can sometimes be anticipated, they typically come suddenly and shockingly, so your supply chain needs to be prepared at all times to handle whatever arises. 

Can Your Supply Chain Handle a Disruption?

When asking whether your company could withstand a disaster, you need to look at it from multiple angles – operationally, financially, logistically, reputationally, etc. We usually spend our time planning how to tackle dreaded issues like a supplier failing or backing out, but this is something we can more easily anticipate, unlike a natural disaster, for instance. So rather than only planning for scenarios we could likely see coming, let's also plan for those spontaneous disturbances that have the power to catastrophically damage our supply chains. When getting started on your crisis management plan, here are some initial questions you should be asking: 

  • What risks does our organization face? Identify where things could go wrong, from a labor strike, to a factory fire, to a tsunami. Consider all possibilities and don't get hung up on the statistical likelihood of any given situation. The focus should be on possible risks and how to handle them, rather than on the probability of their occurrence. 
  • What impact could these risks pose to us? Whether it's a labor strike or a natural disaster, what repercussions would be felt? How would this affect each segment of your global supply chain? Consider constraints on capacity, logistical challenges, prolonged sourcing challenges, etc. Anticipating exactly how your organization could be impacted is key to creating a thorough, strategic plan to manage a crisis.
  • What state is our supply chain in currently? Could it could handle a crisis today?Rather than saying, "Well, I think we'd be fine," turn to roleplay instead. Revisit your answers to the first two questions and act out each scenario. Writing it all down and mapping out potential fallouts from each disruption will help you realize challenges and make it easier to develop a course of action to resolve the issue. 
  • What backup or alternative options do we have lined up? It's safe to say that if your reaction to this questions is, "Uhhhhh...." we have a problem. The good news is that you can start securing backup vendors immediately so you're prepared if something were to happen. Consider qualifying alternate suppliers, freight forwarders, truckers, etc. globally so you're ready to call them up immediately if need be.
  • Are we taking a proactive or reactionary approach to risk management? The mentality that you'll deal with an issue when and if it occurs is not the best plan of action here (namely because it's not a plan, but a lack thereof). While a disruption such as an earthquake cannot be easily anticipated, you can still have a plan in place should it occur. What you can anticipate, though, are supplier and labor issues. For example, by closely monitoring your suppliers and vendors based on a few key performance indicators (KPIs), you can spot trends that could indicate a drop in quality, efficiency, etc. Additionally, keep up with geopolitical events happening in locations vital to your supply chain. If you're in the know, it will be easier to anticipate a disturbance and take action before it's too late. 


Leadership Skills Needed for Crisis Management

Research conducted over a five-year period by Dr. Arash Azadegan, a professor of supply chain management at Rutgers University, shows that certain leadership skills are needed to properly handle a major supply chain disruption. What's more is that the appropriate skills and tactics vary from stage to stage throughout the crisis management process (per the graphic below).

Dr. Azadegan mentions that increased globalization and digitization of supply chains has created a sort of domino effect when it comes to disasters. What this means is that once one sector is affected, the successive sectors feel the effects very quickly after. As he puts it, the closer the metaphorical dominoes are, "the faster they fall." This requires quick responses.

Click image to view larger.

supply-chain-management

To sum up the chart above: As a supply chain manager moves through the four stages of a disaster, his or her leadership skills must adapt accordingly. For instance, starting off with a direct, decisive and controlling tone helps a manager take control of the situation. But somewhere in the middle of the process, it's important to become less decisive and more open to others' ideas to arrive at the best possible solution. Once the recovery period begins, switching back to a more controlling tone is appropriate to move forward with resilience.

Prior to Dr. Azadegan's research, the common perception was that a leaders needed to remain assertive and decisive throughout the entire crisis management process. These new findings are impactful and should shape your own crisis mitigation plan.

4 Steps to Building Your Circular Supply Chain
5 Tips to Diversify Your Supply Chain
Building a Circular Supply Chain for a Circular Economy
5 Tips to Reduce Supply Chain Risk

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Filed Under: Supply Chain Management