Managing Supply Chain Micro Risks — They are Chronic

Stephen DeAngelis

December 23, 2015

In an article entitled “Supply Chain Risk Management Requires a Full-time Effort,” I discussed the difference between chronic and situational disruptions to the supply chain. Situational disruptions are major disruptions caused by such things as natural and manmade disasters. “When you look for articles dealing with risk management in the supply chain,” writes Kai Keppner (@KaiKeppner), a knowledge manager at INFORM, “most of them are all about the ‘big’ disruptions. Earthquakes, hurricanes, sudden economic crises and events of similar magnitude can cause all kinds of problems for a company’s supply chain, like preventing an important supplier from delivering critical parts (example: explosion at Evonik, 2012) or severely damaging the company’s own infrastructure (example: P&G and Hurricane Katrina, 2005).”[1] Keppner, like members of the APICS Supply Chain Council, is concerned that chronic challenges – which he refers to as “micro risks” – don’t receive the proper attention.

According to the APICS Supply Chain Council, chronic supply chain disruption is “a newly defined and pervasive phenomenon.”[2] The Council defines chronic supply chain disruption as “a persistent disruption that degrades, but does not inhibit, supply chain function and that does not respond to traditional remedies.” The Council claims that it “is an issue that supply chain and operations management professionals need to understand and design supply chains to mitigate against.” In an APICS press release, Peter Bolstorff, APICS Supply Chain Council Executive Director, states, “Achieving excellence in supply chain and operations management requires the detection and elimination of everything that interferes with optimal efficiency, including chronic disruption. … It is important to recognize both chronic and situational disruption because it enables supply chain and operations management professionals to align supply chain strategy with risk management processes. Being aware of risks brought on by disruption and having appropriate response scenarios helps mitigate or avoid negative impact.”[3]

Keppner places micro risks in the high probability/low impact quadrant of a traditional risk versus impact quadrant chart. Like APICS Supply Chain Council members, he argues that because these risks are low impact they are tolerated by most companies. And, like APICS SCC members, he thinks that is a big mistake. “Below the radar of traditional risk management,” he writes, “lies the world of events with … high probability and particularly light consequences. … The disruption of a transportation link or a product stock-out are nearly daily business issues for supply chain managers (some say: their justification). The question is: Hurricane, black swan or periodic product stock-outs – what is the bigger risk for your company?” The APICS study identified other types of micro (or chronic) risks. “The survey discovered chronic disruption is frequently caused by internal issues that are hard to recognize and even more difficult to measure. These causes often include a lack of manpower or trained manpower, a lack of updated information technology, short-term financial pressures and more.”

Jonathan Thatcher (@4jthatcher), Director of Research at the APICS Foundation, observes that failure to deal with chronic challenges has consequences such as increased inventory and carrying costs, a loss of competitive advantage, difficulty in trying improve processes, and an inability to achieve customer service goals.[4] Keppner adds:

“Events with a light impact on the supply chain, let us call them ‘micro-risks’, are often not a strategic issue for a company, but a problem at the operative level. Rush orders, missing parts, quality defects or machine breakdowns are not always on the risk manager’s agenda. Nevertheless they are dealt with in a similar manner [to] their big disruption cousins: Ad-hoc contingency planning, often referred to as ‘fire-fighting’, is the chosen weapon. Many companies take such occurrences for granted, since they have a high probability. And they rarely threaten the company as a whole, so they are not considered a ‘risk’ in traditional risk management terms.”

The bottom line is that each of these micro risks detracts from efficient supply chain operations. By tackling these chronic problems, supply chain risk management processes can become even more valuable. Keppner insists, “Built-up micro-risks can become crises.” Thatcher notes that addressing micro risks is not easy because the root causes are hard to detect, visibility into the problem is often poor, and, “companies tolerate [them] due to lack of a solution.” So what can a company do? Keppner writes, “The first step is to accept micro-risks as what they are: events that can be prevented or dampened by planning. The second step is to establish the right counter-measures.” This is easier said than done. Thatcher insists, “Solutions often demand external AND internal root cause analysis, strategic focus, and ongoing supply chain management leadership.” Thatcher proposes a five-step approach for dealing with chronic risks. They are:

1. Detect Supply Chain Chronic Disruption – Is and Is Not Analysis. Thatcher states, “Chronic disruption involves more complex causes and consequences than routine difficulties. … Routine difficulties resolve themselves in the short-term … [and] have routine solutions -– chronic disruption does not. Routine difficulties are visible to most everyone while chronic disruption is not very visible.”

2. Define Chronic Disruption’s Root Cause(s) – Internal and External. Thatcher notes that chronic disruption can result from a combination of things, like unstable demand + long lead times + constrained distribution. Or root causes can be the result of a long series of acute disruptions, like “disorders synchronization” and a failure to recapture synchronization. Or they can be the result of business unit tactics being out of alignment with overall corporate strategy.

3. Break the Tolerance Cycle for Chronic Disruption – Visibility for Costs, Strategy, Competitive Disadvantages. Micro risks (or chronic disruptions) will never be addressed as long as their consequences are tolerated. Thatcher observes that corporate tolerance may be indicated by the gradual acceptance of forecast models that begin to redefine a new “normal” or when supply chain risk management teams hide or underestimate threats. Tolerance can also be identified when excuses are routinely offered for poor performance (e.g., blame games, lack of compliance, or overseas issues).

4. Execute Your Chronic Disruption Solution – i.e., Projects and Allies. Once you have identified chronic problems and micro risks, Thatcher recommends establishing a pilot project with stakeholders to address one or more of them. He notes, “Chronic disruption may be a sign of a less than optimal supply chain strategy, or execution. Compare an optimal supply chain in terms of: make-buy; mix of supply and suppliers; locations of facilities; information system strategy; long-term contract language.”

5. Follow-up: Long-term Strategic Plans and Activity term Strategic Plans and Activity – Be Persistent! “All supply chain risk management faces [the] human nature [instinct] to reduce or end risk management when risk is no longer obvious,” Thatcher states. “In chronic disruption recovery, initial improvement may tempt halting efforts.”

Keppner concludes, “The management of micro-risks not only requires some kind of alert system, but an intelligent solution which delivers concrete options for action. This involves not only playing the digital fire-fighter but preventing problems before they arise. Resiliency is the keyword here. Resiliency comes in many shapes and sizes. In the context of micro-risks, it means being able to prevent critical events before they occur and not to just waiting and reacting.” Fortunately, technology — specifically cognitive computing — can help deal with micro-risks. Cognitive computing systems can deal with many more confounding variables than previous systems and, using advanced analytics, can help identify and resolve chronic problems. Thatcher notes that some chronic problems may only be discovered through text analysis (i.e., what stakeholders are telling each other in emails, texts, etc.). Cognitive computers are ideal for that kind of analysis as well. If you haven’t given much thought to chronic disruptions or micro risks, you might want to give it some attention.

Footnotes
[1] Kai Keppner, “Micro-Risks – A New Perspective on Supply Chain Risk Management,” Inventory & Supply Chain Optimization, 30 November 2015.
[2] APICS, “Chronic Disruption Plagues over 73 Percent of Supply Chain Managers“, APICS News, 4 November 2014
[3] Ibid.
[4] Jonathan Thatcher, “Chronic Disruption – Managing this Surreptitious Supply Chain Risk,” APICS 2013, 21 October 2013.