Thanks to free trade and globalization, now so threatened both from several fronts, supply chains can become very extensive, covering several countries and continents. With the use of these global logistics networks, even the smallest businesses can scale their production obtaining greater profits than the large companies of the last century.
However, this access to globally scaled production has chiaroscuro. The more extensive the supply chains are, the more vulnerable they become in two main aspects:
Vulnerability problem: The more extensive the global production chains are, the more vulnerable they become to one of the nodes being the victim of a crisis -politics, environmental, regulatory, security- that prevents them from achieving their goals in the production chain, what generates lack of supplies and loss of inventories.
Visibility problem: Expanding a network means increasing the number of providers. This complicates the coordination between the nodes, even worse if the suppliers-in turn-subcontract other suppliers to meet their objectives.
At the beginning of this century, the aeronautical company Boeing considered in its business plan to implement a supply chain that reduced the delivery time of aircraft by more than 60% and the production costs by 40%. The strategy was the use of a tiered production system. The lower level manufactured components of the aircraft, the intermediate level joined them in subsystems and the last one finished assembling the aircraft. Along this three-tiered ladder were more than 100 suppliers spread across twelve countries on five continents.
Without a doubt, this represented an excellent opportunity to increase the profits of the company. However, the terrorist attacks of 9/11 in the United States modified their projections. By February 2016, Boeing was able to complete only 380 orders out of the 1,143 it had projected in 2004.
What went wrong? Boeing’s vulnerability was found in the interconnectivity of risks throughout its supply chain. The reduction in the demand for flights was manageable for Boeing, but it was a hard blow for the manufacturers of small components. The fall in the production of a small component that costs just 3% of the total of an aircraft to cause millions of losses was enough.
Once the panic over travel by plane was overcome, the demand for both flights and aircraft rebounded. However, the main supplier of aircraft fasteners for Boeing had already reduced the inputs for its production by 41% as a result of the loss of revenue. Boeing was unable to meet the times originally proposed because one component of its chain was already weakened and was not in a position to return to the level of production it had prior to the terrorist attacks.
Which brings us to the other problem, that of poor visibility. Boeing was aware that delays in any of the levels would lead to delays throughout the chain. Anticipating this, he implemented a computer system to collect the status information of all production phases. The problem was that this tracking system did not guarantee that the information entered by lower levels was correct nor did it provide information about the risks to which the nodes were exposed, as was the case with the supplier of fasteners. Boeing did not anticipate the risks that the terrorist attacks represented for its supply chain as a whole.
More and more companies benefit from producing through global supply chains. But there are also more and more companies that report losses due to unexpected interruptions in these chains. While supply chains reduce costs, they also increase the vulnerability of production.
At Riesgos Políticos, SC, we can help your company establish risk management and crisis management mechanisms. If you have any questions on how to implement it contact us by email email@example.com .