By Guest Editor
By Peter Murray, Managing Director, Supply Chain Risk Management, Rapid Ratings International
A well synchronized, Lean Supply Chain employing Just-In-Time (JIT) inventory methods with supplier integration is a proven competitive advantage, but that advantage quickly evaporates with any supply disruption. A solid supply chain risk strategy is a must in today’s environment of greater uncertainty. The publication of The Machine That Saved the World in 1990 put the name LEAN on the revolutionary methods of the Toyota Production System. LEAN methods are found in every aspect of today’s business and are core to high-performing supply chains. Elements of risk management have been around even longer. A comprehensive supply chain risk management (SCRM) approach leveraging predicative analytics is an emerging discipline, and it’s the discipline and strategy bringing resilience to Lean supply chains.
The central focus of LEAN, eliminating waste, comes directly from Toyota’s JIT philosophy. JIT’s key principle is, “supplying what is needed, when needed,” and came from Toyota’s internal processes and its close physical relationships with suppliers. However, as the approach has evolved for use in global supply chains, leveraging information technology and reliable logistics means the boundaries for JIT are now global, and that kind of scope means business risks will increase dramatically. We’ve seen many failures due to natural disasters, with major performance and financial impact creating a long road to recovery for companies impacted. Companies with better risk plans came out faster and stronger; Nissan recovered more quickly than Toyota after facing the brutal trifecta of earthquake, tsunami and nuclear plant meltdown in 2011.
Low probability/high impact risks are clearly extraordinary events and very difficult to navigate, let alone foresee. Insurance is often the best mitigation path, with a focus on also maintaining business continuity in operations. Higher probability/medium-risk events, such as supplier financial difficulties, lead to performance issues with both quality and delivery and these types of supplier financial issues can be identified through dedicated procurement teams with high levels of financial acumen and predictive analytics. Valuable predictive analytics go beyond commonly utilized historic measures of default.
Cause and Effect
An important component to implementing a successful JIT strategy is a reliable network of suppliers. The increase in capacity over the years, and the rapid price drop for ocean freight, has helped connect these suppliers but it also puts certain networks at risk.
Let’s take the Hanjin Shipping Co. Ltd bankruptcy as an example. Hanjin, the world’s seventh-largest shipping container line, filed for bankruptcy in August 2016. Their bankruptcy highlights the value of Supply Chain Risk Management (SCRM) for lean supply chains relying on global sourcing and ocean freight, since having a SCRM system helps companies manage every-day and exceptional risks along the supply chain. There are three primary reasons JIT supply chains require investment in risk management solutions.
Fixing mistakes is costly. In the event of a disruption where inventory is stalled, a company’s attempts to salvage production, such as rushing replacements by air, can raise costs 10X or more. A company using this strategy may be ill-equipped to handle a sudden surge in product demand, making it beneficial to have a risk management solution in place. Think of it as a back-up plan. It’s hard to know when it will happen, but being prepared can help you stay on track and keep your customers happy.
Increased exposure to disruptions. JIT production of goods is heavily reliant on suppliers. A lean supply chain means there’s less time to recover from disruptions like natural disasters, supplier bankruptcies, or events preventing timely delivery of goods and the ability to meet customer needs.
JIT leaves little room for error. On-demand production means companies must find suppliers willing to fulfill small, frequent orders on short notice, using local suppliers to reduce shipping time and expense. With no back stock of inventory or materials, any supply chain issue can lead to delivery delays and angry customers.
What if you could know which suppliers are facing financial challenges, even before an impending default or bankruptcy, with enough leadtime to work with them to mitigate risk, or if clearly necessary make a change? Well, you can. When managing disruption risks, the strongest and most predictive risk indicator remains the supplier’s financial health. Using a predictive analytic like the Rapid Ratings FHR® (financial health rating) enables risk managers to gain insight into their financial health, for public and private companies, and to choose what suppliers to do business with in the short-and long-term, regardless of their geography, industry, or company type. Understanding your suppliers’ financial health will help your company mitigate some of the risks you may run into.
Risk and Reward
There are two key takeaways related to leveraging JIT strategies for LEAN supply chains. As every aspect of JIT production requires complete supply chain synchronization, its benefits will never be fully realized without sound risk management practices. Having a SCRM solution in place could alleviate repercussions identifying potential risks in your supply chain, and assessing how to fix those risks is not a nice-to-have capability, it is literally a threat to serving your customers and your revenue and profitability. Project-based or annual looks at suppliers isn’t enough. The best practice is to continually take your suppliers’ financial health into consideration. If the company you’re working with isn’t financially healthy, an early indicator will give you an invaluable opportunity to work with them or, if necessary, make a change. Using the JIT strategy alone is risky, but coupling it with a SCRM solution and identifying predictive trends in supplier financial health, can limit supply chain disruptions and the severity of outcomes for your customers and your company.
Peter Murray is Managing Director – Supply Chain Risk Management at Rapid Ratings International. In the role, he provides insight on leading practices in supply chain and procurement innovation focusing on predictive analytics, risk and financial health. Murray is an accomplished executive with 25 years of supply chain innovation and leadership with experience in operating roles, thought leadership, consulting and business development. Most recently, he led the market development for predictive supply chain analytics at Black Box Solutions.
Murray’s experience includes operating and transformative performance roles in Fortune 100 companies. He is well-versed in a variety of industries including life science, agriculture, aerospace, automotive, pharmaceuticals and consumer products with complex global supply chains.
He frequently speaks at major conferences, teaches an advanced supply chain course, publishes articles, and writes a regular column for APICS Magazine. He is a graduate of the University of Vermont (UVM) with a BS in Business Admin / Financial Accounting. In addition, he holds a UVM CE Certificate in Sustainable Business, a Six Sigma Greenbelt, is APICS CIRM Certified (developing the strategic value chain), and is a APICS Supply Chain Council SCOR-P Certified Practitioner and Master Instructor and Oliver Wight Certified Practitioner and Instructor Integrated Business Management.
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