Forecasting the Unexpected

APICS Magazine – May/June 2017
Dave Turbide

On February 2, groundhog Punxsutawney Phil—the United States’ official unscientific predictor of spring—saw his shadow and forecast six more weeks of winter for the country. This year, he was mostly right regarding the weather for the Boston area—which is where I live—but this furry, little prognosticator really is right less than half the time. A coin flip would produce a more accurate forecast, actually. But even professional forecasters who have conducted extensive research and polls and have years of experience make inaccurate forecasts. The point is: You can’t predict the future.

However, you still can—and definitely should—forecast. Even though reality often varies from the forecast, the variation usually is very slight, so only modest adjustments are required. This means that your plans need to be good, not perfect.

The problem with forecasts is that they predict future happenings based on past trends. Although this is not a bad approach, there are cases when outcomes do not follow proven patterns and, instead, something totally unexpected happens. For example, no one could predict the devastation of the earthquake and tsunami that hit Japan and halted production for a large percentage of the world’s microchip and electronics suppliers or the floods in Thailand that destroyed much of the global hard-drive production capacity.

Supply chain risk management is a growing concern for forward-thinking professionals. In fact, a recent study from German consultancy AEB and Baden-Wuerttemberg Cooperative State University in Stuttgart found that minimizing supply chain risk is the second-most important concern, after speed, for the logistics, global trade, and supply chain management industries.

One problem with tackling supply chain risk is the unusual nature of the threat. To address unprecedented or unexpected risks, supply chain managers must be imaginative with their plans and envisioned worst-case scenarios. Sometimes, however, they can learn from the experiences of others and build their own avoidance, transfer, or mitigation plans to minimize, if not eliminate, the effects, of a given risk.

These three strategies—avoidance, transfer, and mitigation—are the primary means of addressing supply chain risk. Avoidance means changing plans or processes to eliminate the risk or its impact. For instance, if there is a risk of piracy in a certain part of the world, ship your products via another route or use another method that avoids that area. The impact of some risks can be transferred by buying insurance or holding the supplier or carrier responsible for any losses, for example. Although this does not reduce or eliminate the risk itself, it protects your organization from the cost of the disruption. Mitigation refers to preventive measures to reduce the probability or severity of a risk. Perhaps the chance of a power outage is a concern. A company could move to an area with more reliable supply, upgrade the incoming service, or install backup generators.

There is a fourth strategy, of course: acceptance. If the cost of avoidance, transfer, or mitigation exceeds the benefit, a company might decide that the proper path is to go forward unprotected. There is a disciplined risk management process that compares the likelihood and impact of a risk against the cost of avoidance, transfer, or mitigation that helps when making these critical decisions.