As companies rushed to embrace globalization, the lean, complex and highly intertwined supply chains that they created over the past decade took on another, unexpected characteristic: fragility. Practices such as just-in-time manufacturing stripped cost and time out of supply chains, while globalization created highly extended supply and demand networks.
The combination of these and other practices creates a perfect environment for disruption. A seemingly small event or outage in one region can and does quickly escalate into full-blown business interruption halfway across the world.
Supply chain volatility can also carry a hefty price tag. More than 60 percent of respondents to a PricewaterhouseCoopers (PwC) survey reported that their performance indicators had dropped by three percent or more because of supply chain disruptions in the past year.However, few companies can afford to devote the capital and other resources needed to build the supply chain infrastructure and capacity to accommodate large surges, dips and disruptions in their supply chains.
Even fewer maintain constant vigilance over operational, socio-political, regulatory, natural disaster and other risks that can compromise a company’s ability to deliver on its value proposition, whether that is defined by low cost, innovation, quality or outstanding customer service.
These challenges are prompting world-class supply chain operators to look for alternative solutions with which to re-wire their networks for efficiency and resilience. One such solution is the lead logistics provider (LLP) outsourcing model. But not the traditional transaction-focused LLP solution, rather a “next-gen” LLP that operates as a strategic partner to deliver competitive advantage, ensure business continuity and drive growth.
Today’s long, lean, interdependent, cost-aware and service-focused supply chains have grown more vulnerable at a time when the potential for interruption is unprecedented. Greater vulnerability is driven by a myriad of factors, including globalized sourcing and production, lean inventory practices, shifting demand and growth geographies, complex interdependencies between industries (e.g. automotive and high tech), shrinking product lifecycles, and rapidly changing consumer behaviors.
This twin dynamic of complexity and interdependency makes supply chains brittle – and open to buffeting or disruption caused by developments occurring anywhere in the world. At the same time, supply chains have assumed a more strategic role in ensuring the health and well-being of the enterprise. Leading global enterprises are now highly reliant on their supply chains not only to support the business but to fuel growth.
It is no surprise, therefore, that in a survey by global business insurance provider Allianz, business interruption (BI) coupled with supply chain risk rank as the number one concern among corporate insurers.On a more granular level, the complexity of global supply chains opens them up to a constellation of threats and vulnerabilities. These risks can be operational in nature, or can be caused by socio-political issues, natural disasters and other hazards.
Startlingly, though, only nine percent of enterprises are fully prepared to handle supply chain disruptions, according to a study by PwC and the Massachusetts Institute of Technology (MIT).The study identified four levels of supply chain risk management maturity and found that almost 42 percent of firms fall into a lower level of maturity. These Level II companies hedge risk by filling the pipeline with buffer stock. While they have basic risk governance mechanisms in place, they lack visibility into changing patterns and potential risks outside the company domain.
While there are a number of reasons behind this statistic, many companies’ basic operating models simply don’t support proactive risk management. “Very often,” notes Paul Parry, VP, Global LLP at DHL Supply Chain. “Corporate supply chain organizations are siloed, can operate on a regional basis, and are disconnected among regions and even sites. As a result, they lack visibility and span of control beyond their part of the operation. That may work day to day, but when you’re in a crisis, it can be a problem.”
Attaining Level IV status – a ‘dynamic supply chain adaptation and a fully flexible response to risk’ – requires a more creative approach to supply chain design and management. This includes solutions such as next-gen LLP, which can offer a comprehensive approach to assessing and addressing risk, along with providing end-to-end visibility across the extended supply chain.
This article was excerpted from a study (Next-generation LLP: Driving new business value in an unpredictable world) sponsored by DHL and authored by Lisa Harrington, a senior research fellow of the supply chain management center and lecturer in supply chain management at the Robert H. Smith School of Business, University of Maryland. Harrington is also president of Lharrington Group LLC, a provider of strategic supply chain consulting services.