IN COLLABORATION WITH GE CAPITAL
Could your company survive a disruption within its supply chain?
It’s not an academic question: Research shows that disruptions are becoming more common as supply chains become more complex and interconnected. By some measures a majority of companies will face a crisis every four to five years. Fewer than 10 percent of companies have proved able to withstand a disruption that lasts 10 days or longer.
This is a particular concern for midsized businesses, because their smaller scale often makes them vulnerable to the larger companies they sell to. Lack of influence, constrained access to capital, and reduced flexibility regarding the company’s ability to run below or beyond capacity make such companies particularly vulnerable to supply chain problems.
Fortunately, midsized businesses also have some key advantages. They can respond to problems more nimbly, since typically their senior management teams all operate under one roof. They tend to have a longer-tenured, more committed workforce that will roll up its sleeves and attack problems quickly. And they tend to be innovative, but cautiously so, investing in new capabilities early, but not quite bleeding-edge early, which has proven to be a smart way to avoid major risks.
Because middle market companies don’t have the resources to address every possible problem that might arise, researchers at the National Center for the Middle Market recommend that companies take six distinct steps to create more resilient supply chains:
- Build stronger relationships with select supply-chain partners. Look both up and down your supply chain, and focus on those partners that you collaborate with and trust the most — they may not be the same partners you do the most business with. Look for ways to share risks and rewards with these key partners.
- Form strategic horizontal alliances. By cooperating with your competitors you can gain access to physical and knowledge resources, share risks, and gain efficiencies. Three car makers, for example, teamed up to develop an online portal that provides comprehensive supply-chain data to a variety of partners.
- Form a cross-functional team of senior managers to develop a “risk register.” This is a central source of information about the probability of risks and associated mitigation strategies. Again, because all senior managers may work in the same location, this is often easier for middle market companies to address than for large companies.
- Focus on core competencies. Be cautious in responding to new customer needs or requests that divert your attention and resources from what you do best.
- Innovate within your core competency. Customers care about innovation — in fact, your brand benefits enormously when you gain a reputation for being an innovative firm. Quality and reliability count as well, of course, but by consistently investing in innovation you help ensure that, should a disruption occur, customers will wait for you to recover because they believe in your company and are therefore disinclined to explore alternatives.
- Capitalize on employee loyalty. Often, the deep knowledge and institutional memory of your employees is what enables your company to spot problems and develop quick solutions. Your employees have your back and are willing to put in long hours to help get the company through tough times. If, that is, you have built a sense of resiliency into your culture.Make sure your employees know that they are respected and appreciated for all that they can do.
Resilience is a highly desirable trait for any company to pursue, but it needs to be approached with a sense of balance. High exposure to risks, combined with limited capacity to address them, certainly creates vulnerability. But, at the same time, any attempt to make your company completely invincible to any and all supply chain disruptions that might possibly occur will eat up precious resources that should be devoted to your growth strategy.
Focus on the most common categories of threats:
Turbulence (external economic factors largely out of your control)
Deliberate threats (piracy, theft, terrorism)
External pressures (competitors’ innovations, government regulation, health & safety concerns)
Resource limits (raw materials, utilities, human capital)
Sensitivity (brand reputation, product quality, reliability of equipment)
Connectivity (scale and extent of your supply network, reliance on specialty sources, use of outsourcing services)
Then map those potential threats against a longer list of supply-chain capabilities, which can range from flexibility in sourcing and manufacturing to efficiency, adaptability, collaboration, financial strength, and more.
To help determine if your company has a good balance between its vulnerabilities and capabilities, use the abbreviated version of the Supply Chain Resilience Assessment and Management (SCRAM) tool.
The goal should be to get your company into the “zone of balanced resilience,” in which you reduce your exposure to risks without unduly eroding profits. Approached methodically and with a sense of purpose, it is a very achievable goal. You can’t avoid every potential problem, but, with the right planning, you can avoid being disproportionately derailed by any single disruption.
This article is derived from a longer research paper, “The Resilient Supply Chain: Competing on the Ability to Come Back from Disaster.” The paper is based on research conducted by Keely Croxton, Michael Knemeyer, Mikaella Polyviou, and Joseph Fiksel for the National Center for the Middle Market, which is sponsored by the Fisher College of Business at The Ohio State University (OSU) and GE Capital. The underlying SCRAM approach was developed by the Center for Resilience at OSU.
For more information on supply-chain resiliency, as well as a host of other challenges and opportunities confronting middle market companies today, visit the National Center for the Middle Market.