Complex Business Challenges Facing Supply Chain Management
Managing a business is like playing a full-contact sport: So many moving pieces are involved, and so many things can change in an instant, that making long-term plans is virtually impossible. How can you really plan for commodity price swings, natural disasters, and financial meltdowns? You can’t. You can’t ignore those possibilities, either.
Instead, you need to think about them and design your business so that it can function well under a range of scenarios. In other words, you need to think about the many different possibilities that the future holds, try to imagine them as a series of events, and then think about how each of them would affect your business.
To use scenario planning to prepare for the unknown and the unknowable, you need to know three really important things:
- Which scenarios are most important to you.
- What you’ll do — and how — in each scenario. (In other words, each scenario calls for a different plan.)
- How you can tell when a scenario is becoming reality. (In other words, as Yossi Sheffi, the Elisha Gray Professor of Engineering Systems at the Massachusetts Institute of Technology says, you need to have “sensors in the ground” to help you decide when to implement which plan. Then the job of supply chain management becomes a process of sensing and responding.)
You need to determine how your business will sense what is happening and how it will respond. This figure shows how your sensors help you recognize which scenario is unfolding so that you can implement the proper plan.
Here are a few practical examples:
- You run a manufacturing company that imports products from overseas, so you need to consider what you’d do if one of your inbound shipments is lost at sea, impounded by customs, captured by pirates, or caught in a port strike. Options might include shutting down your factory until the issue is resolved. You might also consider placing a new order with a different supplier so that you don’t have to close the factory. In an extreme case, you might even declare force majeure and tell your customers that you won’t be able fulfill your commitments to them.
Force majeure is a legal concept that is used in contracts to justify why someone is unable to meet their obligations. Basically, it means that there was a problem that they could not have predicted, prepared for, or prevented.
- You work for a wholesaler that has been selling a product at a steady rate for months, and one month, the company sells twice as much as normal. You don’t have enough inventory to fill all your customer orders, and now you also have back orders to fill. You may even be at risk of losing some big sales and big customers. You might decide to place bigger orders in the future and keep more inventory on hand. That means you’ll be investing more working capital into inventory. If sales drop off in the future, you’ll have to figure out what to do with that extra inventory.
- You work for a transportation company. The company’s customers pay you to deliver their products around the world, and they count on your deliveries to help them meet their commitments to their own customers, so your ability to deliver on time is essential to them. Suddenly, a volcano in a distant part of the world spews ash far into the sky, making it dangerous for airplanes to fly on a heavily traveled flight path. You could reroute your planes, but this is an expensive process that involves developing flight plans, scheduling airplanes, and finding available crews. Alternatively, you could tell your customers that their deliveries are on hold until normal operations can resume.
Thousands of companies have had to face every one of these scenarios in the past few years. In every case, making the right decision about how to respond requires understanding supply chains and supply chain management.
Some supply chain management professionals are generalists and others are specialists. Supply chain experts who are generalists look at the big picture, whereas the specialists focus on a particular step in the supply chain. A good way for you to start learning about supply chain management is to take a look at some of the general principles.