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?

7 comments on “Managing Risk in High-Tech Supply Chains

  1. DataCrunch
    March 5, 2011

    Good points.  The best run supply chains are those that are set up to handle peak volumes and projected growth plans, as well as those that have contingency plans and have been well thought out to handle the “what if?” sceneraios.

  2. jbond
    March 5, 2011

    These are some very valid points. The risk in today's market can have serious consequences. Having a supply chain that can be prepared for the highs and lows of the market is very critical. Having a supply chain manager that can deal with the stress and the volatility of the market, much like an air traffic controller, should allow the company to prosper even in down times.  

  3. t.alex
    March 6, 2011

    I believe mega projects like the airbus A380 or Boeing Dreamliner are dealing with such supply chain issues. Each component in the process is subjected to rigorous inspection before it can really be accepted. The question is if having an alternate source of supply can mitigate the risk?

  4. itguyphil
    March 6, 2011

    I would rather the due diligence be done in the beginning and ensure safety in the components than rushing the QA process then experiencing disaster. The saying is: “Good things come to those who wait”

  5. eemom
    March 6, 2011

    I love the analogy of supply chain managers to air traffic controllers.  The only difference is that air traffic controllers deal with immediate risk management under finite amount of scenarios.  I may be oversimplifying but my point is that supply managers have to deal with a lot of unknown and totally unpredicted scenarios that can take a long time to solve.  It is impossible to plan for all the unknowns (the unrest in the middle east being a perfect example).  The key is to have a versatile enough supply chain that is not overly dependent on one factor with management that is quick to react and put plans in action.

  6. Ariella
    March 7, 2011

    Good point, Pocharles.  The adage that comes to my mind is “A stich in time saves nine,” or “An ounce of prevention is worth a pound of cure.”  Either one touches on the need to antipate risk and to take steps to minimize damage before it happens.

  7. Eldredge
    March 7, 2011

    Are there also strategies for identifying which commodities are at higher risk of supply chain interruptions? These days, products can have a long list of components or raw materials that go into their production,and it would seem logical that the higher risk items need the greater number of risk aversion strategies.

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