The New “Normal” in Supply Management

We've moved from just-in-time to just-in-case

Published: Monday, October 5, 2009 - 19:02

One week in May, I spoke on “Risk in the Supply Chain and Other Changes” at the World Conference on Quality and Improvement (WCQI), the Macon, Georgia, ASQ section, and the Atlanta, Georgia, ASQ section.

My message was that many business rules and assumptions have changed radically since September 2008, especially those in supply management. I would almost say that most business rules have been “reset.” Harvard Business Review says that we need to understand and live with the new “normal.”

The new “normal” in supply management

Let’s look at some of the changes. We are moving from global stability to global uncertainty. We can see this everywhere we look, with the increasing unemployment rate, financial crises, and global warming. We are moving from safe trade to pirated trade. Who would have thought that we’d have Somali, Philippine, and Southeast Asian pirates, who disrupt global trade and add risk to the supply chain.

We are moving back from “Made in China” to “Made in the USA.” While outsourcing and offshoring will continue, there will be more emphasis on domestic sourcing. Why? Offshoring is becoming more expensive with increasing risks. Domestic sourcing results in more control and easier collaboration with sources, making “Made in the USA” a possibility again. Our manufacturing base is dwindling and we need to create domestic jobs. And, of course, we need to balance our trade deficit.

We are moving from “just in time” to “just in case” supply management. A just-in-time inventory system implies that shipments are sent as they are needed. According to the just-in-time strategy, there are few incoming, in-process, or final inventories, which are costly and inefficient. Just-in-case management means a company may need to have buffer inventories of incoming materials just in case there is a disruption in the shipment. A disruption may mean homeland security inspections, pirates off the Philippines, or simply a lost shipment. Regardless of the cause, the solution to keeping production up and smoothing out possible supply interruptions is to have buffer inventories.

We are moving from good food to safe food. Most food tastes good. However, is it safe? In the previous years, we’ve had problems with melamine in food and tainted spinach and peanuts.

Resetting the supply chain

Here is one solution: Move from single sourcing to multiple sourcing. The trend during the last few years has been single source partnering. In a lot of cases, this adds value in terms of building a trusting relationship. But a single source can result in supply risks with too many eggs in one supplier’s basket. For example, an earthquake in China or pirates off Somali can disrupt the supply chain.

You diversify risks through multiple sourcing. I wouldn’t recommend multiple sourcing for every commodity, product, or service. Each sourced area would have to be evaluated based on risk, cost of ownership, service, and so on. This should be done selectively. Commodities may have multiple sources. High-value and technology-intensive products may have to be single sourced with an acceptable alternate supplier.

Another solution is to have your company undergo a risk audit, a growing business according to a global ISO quality management system (QMS) registrar with whom I recently spoke. “Supply risk management is the future of our company,” he told me. I believe it. They, as well many global ISO QMS registrars, are moving from supplier quality management systems compliance auditing to supplier risk auditing. Compliance auditing is still largely based on intensive paperwork reviews at one point in time and in one location.

These point- or location-specific assessments are still critical, however, there are larger supply chain issues that need to be addressed. For example, how would the disruption of one factory affect the total supply chain? What about the “white space” risks between key value chain processes, such as transportation, upstream/downstream suppliers, weather, pirates, or incoming security inspections. Each of these white-space risks can add additional uncertainty and risks to the supply chain.

There are other solutions, of course. In future columns, we’ll discuss what those solutions are and why they take some of the risk out of your supply chain.

About The Author

Greg Hutchins

Greg Hutchins is an engineer, certified enterprise risk manager, and the founder of the Certified Enterprise Risk Management Academy, Made in the U.S.A., WorkingIt.com, and Quality + Engineering.