First Thoughts
  By Dan Gilmore - Editor-in-Chief  
  August 27, 2009  
  Supply Chain Mega-Risks to Consider  

Risk management has become a fundamental element of current supply chain thinking, but how far do you take it? I really liked some of the recent thoughts in our column, for example, on connecting risk analysis to actual dollar impact, as suggested by Mitul Shah of Infosys in a recent Expert Insight post.


But how far should you take it? I believe there are a number of fairly sizable, general supply chain risks for most of us lurking out there, most of a geo-political nature, for which many companies would do well to give some consideration. They are listed below, in order of probability from my view:


Terrorist Incident at a US Port: The possibility of a terrorist incident at a US port at some point seems, to me, to be quite high – and others agree. In fact, I remembered and found an article we did on a study by one research institute in 2007, where we wrote that “Ports are attractive targets because they are vulnerable, and due to the perceived potential for economic damage and loss of human life. For supply chain professionals, however, there is another aspect – the potential for an unimaginable supply chain disruption.” (See Thinking the Unthinkable - The Economic and Supply Chain Impact of a "Dirty Bomb" at Ports of Los Angeles and Long Beach.)


The study we reported on then said that if there were a “dirty bomb” incident at LA/Long Beach, the overall economic damage could be in the hundreds of billions of dollars. One big driver of that was how long the port was closed after the incident: a few weeks, a few months, a year? More?

Gilmore Says:


If oil soared literally overnight, I am sure some companies would be more agile and, therefore, hurt less than others that aren’t as well prepared.

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The question is what would happen from any sort of incident in one port at other ports. Certainly, all ports would be closed for awhile. When they opened up, they would do so in a very slow and controlled fashion. The flow of goods would come to a crawl for some time.


An executive at Payless Shoes, a major importer, told me several years ago that all the investments they had made in compliance, security, arrangements with carriers, etc., would pay off in such a situation – their containers would move first.


The likelihood of something happening eventually seems strong, even as we race (sort of) to change technology and process to thwart such an attack. Whether any incident would be a minor or major one is a total unknown.


Is your company prepared? Is everything running through one port, which may be the one hit? Have you asked the TSA what it thinks might happen, and how companies can be prepare? Do you have contingency plans for the flow of goods and domestic supply?


Israel Attacks Iran over Nuclear Capabilities: Making any predictions about what may happen in the Middle East is a Fool’s Errand, but I, nevertheless, think the likelihood of some sort of eventual Israeli strike on Iran’s nuclear capabilities - just as they did against Iraq in 1981 – is fairly high.


Indeed, earlier this summer, VP Joe Biden gave - according to some – a go-ahead of sorts for such a move. Many have said the US would not be unhappy to have Israel do some of the dirty work for us. Just this week, former Israeli ambassador to the United Nations and best-selling author Dore Gold is on the news shows saying Iran must be stopped.


If such an attack occurs, oil prices would immediately skyrocket, easily to the $150 or so level we saw in mid-2008, according to Stephen Schork, a widely respected oil industry analyst.


How high, and for how long, depends heavily on what happens next. Iraq, basically, just folded its tent in 1981. If Iran counteracts, we may see $200+ oil for months.


If oil soared literally overnight, I am sure some companies would be more agile and, therefore, hurt less than others that aren’t as well prepared, and/or can’t adjust their transportation strategies and inventory/logistics trade-off curves as fast.


Have you thought about this potential development, or performed any scenario planning? 


Swine Flu Outbreak: To be honest, I have thought that this has generally been overblown, and that the risk of a true pandemic overstated, but am less confident of that now.


The CDC has recently said that 30-50% of the US population could become infected this winter, even as they madly try to get a vaccine to market.


Will there be an impact on companies and supply chains if a major outbreak occurs? I notice Clorox is often the top Google sponsor for searches on Swine Flu – looks like they expect a bump in sales from 24 x 7 disinfecting.


Many/most would go the other way – as an easy example, restaurant traffic would likely plummet even from today’s lousy numbers. It could be better or worse in other countries, perhaps changing demand there substantially or complicating sourcing processes; factory workers might just stay home.


I have less understanding of how to prepare for this or make contingency plans, but it’s something I would be thinking about, and looking to react quickly as things developed, rather than being caught behind the curve with too much or too little inventory.


Fall of the Dollar/US Inflation: The US is falling into debt by trillions more than previous years, and the Congressional Budget Office just raised its deficit projects by additional trillions over the next decade.


All kinds of things can happen if this plays out as some predict: Interest rates rise, maybe substantially, as the US has to pay more and more to borrow the money needed to finance the debt. Inflation, perhaps of Jimmy Carter-era variety, arises as the government decides that printing money is the only way out of the mess.


Seeing this, there is already talk in some quarters (China, Russia) of replacing the dollar as the world’s reserve currency. That would put further pressure on the dollar to the downside.


Warren Buffet recently warned of some very negative effects coming down the road from this deficit binge.


Beyond the macroeconomic impact, there would be supply chain impacts. In general, oils, metals, and other commodity prices should soar. What is odd this time, though, is that the US, with a greatly weakened dollar, could be hit much worse than other countries in terms of such commodity inflation.


If general inflation and/or interest rates soar, the cost of holding inventory becomes much greater. However, this could also occur with much higher transport costs from rising oil prices (still, for now, denominated in US dollars), so what the trade-off curve would look like there is uncertain.


In theory, US goods would become much cheaper, and exports would rise – while the price of imports would soar, and the advantages of offshoring would be altered. The calculus of where you make products would shift dramatically.


So, are you doing your supply chain planning based on assumptions of the types of low inflation and a relatively strong dollar we have seen for three decades? Or are you considering what might change under the other scenario about which many now warn?


That’s all the “disaster” scenarios I have room for now. I know most of us just go about our jobs and let someone else worry about this kind of stuff – but let’s remember that with every crisis, there are supply chain winners and losers.


Are these risks the type of things companies and supply chain strategists should worry about and plan for? What would you add? What do you think are the most likely to occur, and what will be the impact? How can companies prepare? Let us know your thoughts at the Feedback button below.

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