The Catch-22 of Supply Chain Risk Management

One of my favorite books is the classic “Catch-22” by Joseph Heller. In the book, the main character, Yossarian, is desperate to find a way to avoid combat missions. Those missions, in the long run, would almost certainly get him killed. So, he wanted to be classified as insane to avoid those missions.

“There was only one catch and that was Catch-22, which specified that a concern for one’s safety in the face of dangers that were real and immediate was the process of a rational mind.” If you were crazy, you could be grounded, all you had to do was ask; but as soon you did, you would no longer be crazy and you would have to fly more missions.

Following the coverage of large natural disasters, like the tsunami and nuclear meltdown in Japan, it strikes me that a similar kind of double-bind thinking occurs in these situations too.

The ultimate point of supply chain management is to help companies be cost competitive while maintaining the bare minimum of inventory consistent with achieving a targeted service level. Global outsourcing, reducing the number of suppliers you do business with, and using optimized planning to reduce inventory are common techniques companies use to accomplish a cost-effective supply chain.

But all of these things that make for a lean and mean supply chain can also cause a supply chain to become brittle and break in the face of disasters. Toyota, for example, is facing a large drop in market share because of the Japan earthquake.

Supply chain risk management says that you can avoid this outcome by having redundant factory lines in different geographic locations, using multiple suppliers, and carrying more inventory in locations around the world. These actions, of course, are the very opposite of what it takes to be a low-cost supply chain.

This double bind is most acute for companies that compete mainly on price rather than service or product attributes. If these companies practice the prescribed risk management practices, they might find themselves losing a little market share year after year to competitors that don’t engage in supply chain risk management. Eventually, the company becomes an afterthought in the market.

On the other hand, if a company runs a brittle, low-cost supply chain, the company may gain a little market share year after year until a disaster occurs. The firm then experiences a huge drop in market share all at once.

Now there are risk management practices that any company can adopt that do not fall into the category of a double bind. For example, a firm can do contingency planning upfront on who will do what when a facility goes down. The company can look for components widely used across its products that would put significant revenues at risk if the supplier of that component was to experience difficulties; for these components, the company should look at dual sourcing.

And companies can have preset playbooks in place for disasters that are more likely to occur. JDA (an ARC client) is doing product development in this area. For example, many retailers know that hurricanes are apt to strike the Gulf region every year during certain months. These retailers also know what products would be in demand when a hurricane hits, so they could carefully track hurricane forecasts and move the necessary inventory forward to key DCs before a hurricane strikes.

But for companies that differentiate mainly on price, the core practices associated with supply chain risk management will continue to represent a Catch-22.