Many companies are confident their supply chain operations are immune from both natural and man-made disasters but fall short when operations do get disrupted due to not having a risk mitigation strategy in place, says an Avnet executive.
Gerry Fay, chief global logistics and operations officer at Avnet, told ZDNet Asia during an interview here Wednesday that businesses globally tend to assume their supply chain operations will be able to withstand shocks but are usually given a rude shock when these situations do arise.
He explained that the complacency set in during the period between 2000 and 2009, when it was easy for companies to get electronic components from suppliers as there was surplus inventory due to the dotcom crash at the turn of the century. Enterprises then started to build their supply chain systems based only on price without worrying whether these suppliers would face operational disruptions, Fay added.
Thus, when back-to-back natural disasters took place between 2010 and 2011, including Iceland's Eyjafjallajokull and Grimsvotn volcano eruption, Japan's tsunami and earthquake, and heavy floods in Thailand, these caused significant damage to the global supply chain. These include component shortages and, with it, spikes in price which hit many manufacturers' bottom lines, he said.
Besides natural disasters, companies also fail to understand the importance and risks associated with picking the right supplier. Fay noted that if a key supplier fell into financial problems and became bankrupt, this could mean companies not getting their components which might negatively impact their companies.
There could also be scenarios when component makers are just unable to meet the deadlines, in which case this may pose challenges to companies too, he added.
"Natural disasters bring the issue of supply chain risk management to the forefront, as they impact so many companies at a time," the Avnet executive said. "It is the everyday risks that companies may not be aware of."
Resilient supply chain an advantage
This is why a risk mitigation strategy for supply chain operations is essential, said Fay, adding the more supply chain leaders understand the risks associated with their systems, the better they would do in keeping it up and maximize revenue for their companies.
Without such a strategy, companies may find that should another natural disaster befall a key components market, they would be scrambling to compete with companies that have contingency plans set in place for such scenarios, he warned.
"If any part of the supply chain breaks, it will be revenue loss for the company because every portion of the supply chain is essential for the business to function," he added.
In order to comprehend the various risks, the Avnet executive suggested companies undertake a value-for-risk evaluation, which is based on the sum of probability of potential events times the impact of the events on the supply chain.
The model should also look at risks, probability of occurrence, and potential monetary loss to segment the threats and focus on those most critical for the company, he elaborated.
Companies ought to create stronger relationships with their suppliers which are most critical to their businesses too, so they can better understand their partners' operations and challenges. Doing so, they are able to factor these aspects into their risk mitigation strategies action and mitigate them, he said.