Managing Risk in High-Tech Supply Chains

We both have a keen interest in the aerospace and defense industry, and given that our consulting lifestyles have us on airplanes most of the time, we're also naturally curious about what goes on behind the scenes. Listening to United's air traffic control channel, Channel 9, is fascinating and mesmerizing. Steve also can't get enough of Flight Control on his iPad.

So what does this have to do with supply chains? Try to imagine you're an air traffic controller working the Atlantic Corridor the day before Thanksgiving as an early winter storm bears down. (Or imagine you have more than 20 planes on your iPad screen and the collision alarm won't stop beeping.) That is a decent proxy for the complexity of managing a high-tech supply chain right now.

What we're talking about is managing risk. If you’ve ever read a company’s annual report (10-K) or quarterly earnings report (10-Q), you’ve probably seen the section about corporate risk disclosures. In the past, these disclosures often seemed canned and trite, being standard or generic items that didn’t warrant much attention. However, with all the volatility in the world today, the list of corporate risk disclosures is growing, according to new reports.

Investors are taking note of the need for foreign corporate risk management, and this is a good lesson for us supply chain professionals. Why us, in particular? Because the extended supply chain is where we can sense and try to mitigate risk. Supply chain professionals are increasingly the air traffic controllers of the high-tech world; they must gather data and information, react quickly, and try to make the best decisions possible.

We’re faced with inflation risk and threats to supply chains, whether it's commodity prices or wage increases in China, Mexican cartel violence affecting manufacturing and transportation, or unrest in the Middle East threatening closures of the Suez Canal. These dynamics are incremental to the economic uncertainty that continues to exist in the marketplace. And supply chains continue to be at the mercy of the weather.

Balancing supply and demand, production planning, sourcing, and transportation scheduling have gotten much more complicated. Like Wall Street, supply chain management is taking a harder look at risk management. To manage this risk, supply chains need to embrace analytics, incorporate financial data for scenario-modeling, and understand business trade-offs. Supply chains also need hedging strategies to improve flexibility.

For example, dual-sourcing strategies can add capacity, and often lead time flexibility, but they also help to hedge against currency and cost fluctuations. There are financial hedging strategies in sourcing and procurement, such as buying futures contracts for steel, copper, corn, or fuel. Then there are operational hedging strategies, such as regularly adjusting production volumes across a manufacturing network to combat volatility with exchange rates, labor costs, or material prices.

Decision-making for your supply chain requires the skills of an air traffic controller. We're curious: What risks are you dealing with, and how are you managing them?