The Supply Chain Balancing Act
ISE Magazine -Volume 49: Number 03
By Chris Hook and Alexander Hong

How to remain agile in an increasingly uncertain global environment

Efficient supply chains characterized by low inventory levels and highly transparent operations are still the norm. Make no mistake – this is a good thing. But when does this become too much of a good thing?

A growing number of U.S. executives are moving some production operations back from overseas. While there are a great number of factors driving that trend, one is the need for supply chain flexibility. Although the global economy is in the midst of a recovery, a significant amount of risk still exists due to the combination of geographically diverse supply chains and JIT manufacturing that results in low inventory levels. To flesh this out, let’s take a look at an example.

The Boeing 787

As with most complex manufacturing feats, the production of Boeing’s technically impressive carbon fiber jet, the 787, relied heavily on outsourcing for certain specialized components – about 35 percent of the total content of the 787 aircraft. In March 2011, a massive 9.1 magnitude earthquake 231 miles northeast of Tokyo shook production to its core and interrupted 25 percent of the world’s silicon-wafer production, setting in motion billions of dollars in cost overruns. The primary driver behind the significance of this impact was due to low inventory levels brought on by the application of JIT. Instead of inventory allowing producers a “margin of error” to deal with this disaster, each day of downtime resulted in significant losses.

There is no doubt that globalization has prompted a change in the landscape of businesses over the last couple of decades. This has in turn driven businesses not only to ensure that their supply chains are efficient, but also flexible.

But what does a flexible supply chain entail? As supply chains have shifted from solely vertical and horizontal integration to a strategy of outsourcing, our definition of flexibility also must change.

When we talk about applying lean manufacturing methods, like JIT, it’s to support variations in demand. In short, the ability to operate efficiently can assist in fighting demand volatility. However, as supply chains become more complex, flexibility must also remain a priority, specifically regarding the mitigation of risk. Luckily, by altering a few simple tools, like SIPOC, for example, business owners large and small can take a first step toward protecting themselves from risks to their supply chains.

Altering SIPOC to identify risk

A SIPOC (sometimes COPIS, the reverse of SIPOC) is a tool that summarizes the inputs and outputs of one or more processes in table form. The acronym SIPOC stands for suppliers, inputs, process, outputs and customers. Those five categories form the columns of the table.

This simple framework has been used for decades by companies big and small to brainstorm improvement projects and develop new supply chains. Given this strong fundamental foundation, this framework can now be altered to use as a tool in combating the potential risks of a globalized supply chain.

Start by identifying your customers and work backward. After completing your initial cut at mapping your primary supply chain via SIPOC, start over with your suppliers category and ask yourself, what has the potential to change the performance and efficiency of this supplier? Repeat this step for each SIPOC category within your initial supply chain, taking care to document every detail of each potential impact.

At this point, you’ve identified potential risks to your supply chain, which is an important step in risk mitigation planning. After identifying the risks, work through potential mitigation strategies to address each individual risk.

From SIPOC to risk mitigation

After documenting alternate processes, you can begin to investigate the viability of each alternative, taking into account the relative current and future costs of each process, the probability of risk occurrence, as well as the consequence of each risk if realized.

To execute a risk assessment for your supply chain, you first need to determine the criteria with which you’ll assess the consequence and the likelihood of each risk. These criteria will likely deviate from project to project, but should remain constant for all risks concerned for a single effort.

Additionally, a risk cube is a great tool to visualize the convergence of risk consequence and likelihood. Each risk is mapped on this cube according to its relative consequence and likelihood level.

At this point, you have a list of risks to each element of your initial SIPOC; a preliminary assessment of risk consequence and probability of occurrence; and a suite of risk mitigation strategies to include alternate SIPOC diagrams, potential backup suppliers, alternate designs and other strategies. The next step is to assess the potential cost of securing each mitigation strategy now (e.g., maintenance of alternate suppliers, investment in platforms for products to reduce vulnerability, contracts with manufacturers to ensure priority supply) versus the cost of the option to delay the decision until the risk is realized, in other words, in reaction to the realization of risk.

Murphy’s law, as you likely know, is a popular adage that essentially states that things will go wrong in any given situation if you give them a chance. Although the majority of us realize this truth, enough of us do not use pre-emptive mitigation planning in our supply chains to account for this variability. Instead, once suppliers are defined and operations are set to facilitate the flow of goods, the planning ends. Fortunately, this simple take on continuous improvement tools, like SIPOC, can get you and your supply chain ready for whatever lies ahead.