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Stress Testing Supply Chains Key to Building Resilience

 

David and Edith Simchi-Levi Say Process Similar to Bank Testing is Needed, Maybe by US Government for Essential Sectors such as Pharma

July 8, 2020
SCDigest Editorial Staff

In the face of the coronavirus crisis, building improved supply chain resilience is perhaps the hottest topic in the industry right now, with literally dozens if not hundreds of articles and pundits weighing in on what companies need to do to become more resilient.

That after product supply has been disrupted across the globe, starting with factory and port closures in China stemming from the virus outbreak there in the first few months of the year. Eventually that spread to the US and other countries as the virus threatened the survival of many sources of supply due to forced closures and/or a dramatic drop in demand.

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There are many variables that must be considered in changing sourcing strategies. But the Simchi-Levi's say that "without understanding the vulnerabilities that currently exist, such decisions can't be made."

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That after product supply has been disrupted across the globe, starting with factory and port closures in China stemming from the virus outbreak there in the first few months of the year. Eventually that spread to the US and other countries as the virus threatened the survival of many sources of supply due to forced closure and/or a dramatic drop in demand.

Writing on the web site of the Harvard Business Review, Dr. David Simchi-Levi of MIT and his wife Edith Simchi-Levi note that with supply chain disruptions in critical areas such are pharma, medical supplies and food, a change of approach is needed.

They say that In order to prevent this problem from occurring again when the next disaster strikes, governments should consider establishing a "stress test" for companies that provide critical goods and services, something akin to the stress tests for banks that the US government and European Union instituted after the 2008 financial crisis.

This stress test would focus on the resilience of company supply chains in some sectors.

The Simchi-Levi's say a major reason for the shortages that have occurred during the pandemic is the emphasis on lean global supply chains. That involves just-in-time methodologies in manufacturing, and holding low levels of inventory throughout the supply chain.

These strategies also "rely on forecasting based on historical data and do not typically consider any major disruptions," the Simchi-Levi's write.

But the answer isn't just to bring production back home to the US. Since China is now the dominant, if not sole, source for thousands of items, reducing dependence on it in many cases will take considerable investment and time, the Simchi-Levi's note.

What is needed to make supply chains more resilient, they say, is to begin by mapping the layers of suppliers, manufacturing plants, distributors, and other elements of the logistics network, and then applying a stress test to evaluate the ability to recover from the disruption of these sites.

For a number of years, David Simchi-Levy has advocated a similar type approach to bank stress tests for assessing supply chain risk.

His methodology has two foundational elements. One is time to recover (TTR), the time it would take for a particular node in the supply chain to be restored to full functionality after a disruption.

The second is time to survive (TTS), the maximum duration that the supply chain can match supply with demand after a facility disruption.

(Article Continued Below)

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By quantifying each measure under different scenarios, a business can identify its ability to recover from a disaster. For example, in a previous HBR article Simchi-Levi said that if the TTR for a given facility is greater than the TTS, the supply chain will not be able to match supply with demand unless a backup plan exists.

"This approach provides companies with a way to financially quantify the cost of disruptions and prepare mitigation plans for the most critical parts of the supply chain that could be applied in different scenarios," he added.

Once there is an understanding of where bottlenecks are located, various mitigation strategies can be considered, including adding manufacturing capabilities or suppliers or creating buffer stocks.

The Simchi-Levi's say that companies using this approach often find hidden risks they did not know existed.

For example, work with Ford using this methodoloy identified unexpected high risk associated with small suppliers, including many local firms. In one case there was a low-cost sensor widely used in Ford vehicles: If the supply of that part were disrupted, the carmaker would need to shut down its manufacturing operations for the sake of one small, inexpensive part. Because of the total amount spent on this item was low, Ford's procurement group had not paid much attention to it.

There are many variables that must be considered in changing sourcing strategies. But the Simchi-Levi's say that "without understanding the vulnerabilities that currently exist, such decisions can't be made."

They conclude by arguing that "Companies need to act now to uncover the weaknesses that exist in their supply networks, and governments must decide which industries are essential to their countries. Only then can they begin to take steps that will ensure that the turmoil generated by the pandemic doesn't happen again."

Do o we need stress tests for supply chains? What do you think of this approach? Let us know your thoughts at the Feedback section below.

 

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