Supply chain disruption and how to manage it

Supply chain disruption has a boosted importance in a more globalised business environment. As part of your governance training, you should know how to manage it. 

The truth is simple: modern supply chains know no boundaries. Your services and products could be sourced from anywhere and include vast combinations that, on paper, don’t reflect the myriad of risks that local circumstances might bring. 

Because of that, your supply chains could quickly encounter disruption occasionally. The trick isn’t to avoid them altogether; it’s to ensure your operations can survive in spite of them. This involves a few different tactics that we’ll discuss below:

Supply chain disruptions usually occur when the flow of goods or materials is interrupted; however, they can also affect information.

Disruptions will lead to delays, increased costs, or complete halts in production in the most severe cases.

Dealing with supply chain disruption is often split into two approaches:

• The proactive: preparing for potential future disruptions
• And the reactive: responding to disruptions that have already happened

Well-governed companies will have strategies in place for both of the areas above. Given the dynamic nature of modern supply chains, both are essential.

The proactive approach involves considering what could happen to your supply chain and putting plans in place to address those risks. 

Doing it correctly involves identifying potential disruptions and assessing your suppliers’ reliability, geopolitical risks, tech dependencies, and evolving cost pressures—things that could fluctuate over time and directly impact how you buy and sell. 

Once you identify these potentials, the next step is ensuring you have strategic ways of dealing with them if they ever become problematic. It often helps to have people with first-hand experience on your team, as this can benefit your forward-thinking. 

There are a few well-established tactics to prepare for supply chain disruption:

• You can build strategic stockpiles in a “rainy day fund” approach, so you have products even if your supply chain fails. However, this is restricted to products that don’t perish quickly. It also means you have significant assets that are not selling and may depreciate in value. So, it really is a failsafe approach. 
• You can develop contingency plans for supply chain disruptions, such as focusing on certain products if you struggle to obtain others. 

However, in modern supply chains, the number one recommendation is diversification. Ensure your supply chain doesn’t rely on one factor in one country with one line of connection. 

For example, say your entire line of products came from Goa, India, to Barcelona, Spain, through the Suez Canal. Imagine the very real agony if the Canal were to become clogged due to a ship that got stuck. 

Throw in other hypotheticals, such as a flood in Goa or a port workers’ strike in Barcelona. These things can completely shut down your production line because you have no alternatives. 

In a globalised supply-chain world, these localised events can kill an entire company, but corporate leaders can easily avoid them by diversifying the suppliers they depend on.

Planning can be helpful, but supply chain disruptions will inevitably involve reactive, crisis-management strategies, especially when a disruption hits in ways you hadn’t thought of. 

In cases like this, companies must act swiftly to minimise the impact. Key steps include:

1. Activate crisis management teams: These should include cross-functional leaders from supply chain, procurement, finance, and IT to ensure coordinated efforts across the business.
2. Communicate transparently: Maintain clear and regular communication with all stakeholders, including suppliers, customers, and employees. Not doing this can easily make a crisis far worse, as critical stakeholders are automatically out of the loop. 
3. Leverage technology: Tech can provide new crisis management tools yearly. Use data analytics and digital supply chain tools to gain real-time insights into inventory levels, supplier status, and demand shifts. This can help you make quick, informed decisions. For example, if you need to choose which strand of your supply chain to restore first, you can use tech to identify the most popular products or services.
4. Prioritise critical operations: Keep critical operations running by reallocating resources, adjusting production schedules, or shifting to alternative suppliers.

There’s a lot of executive and management work involved in managing supply chain disruptions, but a board shouldn’t interpret that as an invitation to take a hands-off approach. Supply chains are a business’s lifeblood, and a board is responsible for ensuring they have what they need to function. 

Their primary roles are:

1. Oversight and accountability: Directors need to ask the blunt questions of supply chains before any disruption. If they rely too much on one location, directors should want to know why. 
2. Support for investments in resilience: Directors should ensure that all supply chain components have the resources they need—not just to function normally but also to adapt in the face of disruption. This creates resilience, a quality on which well-governed companies thrive.
3. Monitoring and reporting: Boards should require regular reports from management on the state of the supply chain, particularly in times of disruption. If those reports don’t come regularly, directors should follow up.

Supply chain disruptions are inevitable. No strategy can eliminate the risk. Good companies will recognise that and have a well-crafted balance between pro-active and reactive mitigation tactics.