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Author: Lawrence V. Snyder, Zuo-Jun Max Shen
Coping with disruptions in demand requires different strategies than coping with disruptions in supply.
For as long as there have been supply chains, there have been disruptions, and no supply chain, logistics system, or infrastructure network is immune to them. Nevertheless, supply-chain disruptions have only recently begun to receive significant attention from practitioners and researchers. One reason for this growing interest is the spate of recent high-profile disruptions, such as 9/11, the West Coast port lockout of 2002, and hurricanes Katrina and Rita in 2005.
Another reason is the focus in recent decades on the philosophy of “lean” supply chains, which calls for slimmed-down systems with little redundancy or slack. Although lean supply chains are efficient when the environment behaves as predicted, they are extremely fragile, and disruptions can leave them virtually paralyzed. Evidently, there is some value to having slack in a system.
A third reason for the growing attention paid to disruptions is that firms are much less vertically integrated than they were in the past, and their supply chains are increasingly global. A few decades ago, many firms manufactured products virtually from scratch. For example, IBM used to talk, only slightly hyperbolically, about sand and steel entering one end of the factory and computers exiting the other. In contrast, today’s firms tend to assemble final products from increasingly complex components procured from suppliers rather than produced in-house. These suppliers are located throughout the globe, many in regions that are unstable politically or economically or subject to wars and natural disasters. In his recent book End of the Line, Barry Lynn (2006) argues that this globalization has led to extremely fragile supply chains.
Supply-chain disruptions can have significant physical costs (e.g., damage to facilities, inventory, electronic networks) and subsequent losses due to downtime. A recent study (Kembel, 2000) estimates the cost of downtime (in terms of lost revenue) for several on-line industries that cannot function if their computers are down. For example, the cost of one hour of downtime for Ebay is estimated at $225,000, for Amazon.com, $180,000, and for brokerage companies $6,450,000. Note that these numbers do not include the cost of paying employees who cannot work because of an outage (Patterson, 2002) or the cost of losing customers’ goodwill. Moreover, a company that experiences a supply-chain disruption can expect to face significant declines in sales growth, stock returns, and shareholder wealth for two years or more following the incident (Hendricks and Singhal, 2003, 2005a, 2005b).
Disruptions in supply or
demand tend to cascade
through the system.
The huge costs of disruptions show that business continuity is vital to business success, and many companies are actively pursuing strategies to ensure operational continuity and quick recovery from disruptions. For example, Wal-Mart operates an Emergency Operations Center that responds to a variety of events, including hurricanes, earthquakes, and violent criminal attacks. This facility receives a call from at least one store with a crisis virtually every day (Leonard, 2005). Other firms have outsourced their business continuity and recovery operations. IBM and SunGard, the two main players in this field, provide secure data, systems, networks, and support to keep businesses running smoothly during and after disruptions.
Supply chains are multi-location entities, and disruptions are almost never local—they tend to cascade through the system, with upstream disruptions causing down-stream “stockouts.” In 1998, for example, strikes at two General Motors parts plants led to shutdowns of more than 100 other parts plants, which caused closures of 26 assembly plants and led to vacant dealer lots for months (Brack, 1998). Another, scarier, example relates to port security (Finnegan 2006):