The Impact of Disruptions on the Supply and Demand for Goods - Essay Example

Supply Chain Management Introduction Supply chains are vulnerable to disruptions and so the need for systematic analysis of supply chain vulnerability, security and resiliency is of paramount importance (Snyder et al 2006; Elkins et al 2005; Juttner et al 2003; Rice and Caniato 2003; Sheffi 2005). These disruptions can take many forms and they also impact the demand and supply for goods. The impact of disruptions on the supply and demand for goods Disruptions in air transportation will affect the supply of and demand for goods across the world because air is the fastest way to transport goods over long distances both over land and across water. Businesses make plans based on the time it takes to ship or airfreight goods from one place to the next. The time it takes from order to delivery is factored into the lead time and in arriving at a re-order level for inventory supplies. Some firms do not have enough warehouse space to store goods and so they depend on the goods to come when they are needed by the customer. Tang (2006) indicates that systems such as reducing the supply base, just-in-time (JIT) and vendor managed inventory, and outsourced manufacturing are some of the supply chain initiatives that have been used to increase revenue and reduce assets. However, Tang (2006) also indicates that although these are great initiatives in a stable environment they have created longer and more complex global supply chains which increase their vulnerability to disruptions. Although, the implementation of such systems are represents measures that firms employ in their attempt to become cost effective and therefore competitive. However, Lee (2004) indicates that there is generally a very large hidden cost which accompanies cost efficiency measures when disruptions occur. Therefore, cost efficiency needs to be balanced with agility, adaptability, and alignment. Lee (2004) also indicates that the objective of agility is to respond to changes in demand and supply that occur in the short term expeditiously; in the case of adaptability it is to make the necessary adjustment to the design of supply chains in order to accommodate changes in the market; and in terms of alignment, seek to improve the performance of supply chains by establishing incentives in order to motivate partners. Lee (2004) also suggests methods that can be used to achieve these objectives. When these disruptions take place there is loss of revenue as firms often run out of supplies. In the case where the supplies are finished goods it means that customers will be inconvenienced. This inconvenience is even greater when there is no other source of supply. If the goods are raw materials it means that production may have to be halted until a new supplier is found or until the supplies of goods arrive. Therefore, customers will also have to wait longer before their demands can be satisfied. Firms also face increasing costs because of the fact that when supplies have to be sourced temporarily to fill demand it usually comes at a higher price than normal. While this is taking place permanent employees have to be paid even if they have nothing to work with. In most cases workers who are employed temporarily are laid off until things return to normal. Though the firm may be able to charge the customer based on the increased price, it is not normally possible especially when the price was already quoted. Additionally, increasing the price may result in the loss of customers. There may also be issues relating to reliability as customers do not expect firms to run out of stock without giving due notice. If the customer is dependent on only one supplier then this will definitely have a negative impact resulting in a total loss of business from specific customers or a partial loss of business. This partial loss or reduction in demand from specific customers may result from their (the customers) application of various strategies to prevent any reoccurrence of this type of scenario. Therefore, instead of using one supplier the customer may start looking at another or other sources of supplies. Wisner et al (2012) indicates that using a single supply source is a risky proposition and recommends that where favourable circumstances exist to warrant multiple sources, more than one supplier should be sought. However, the number should be kept to a minimum. Events like these have ripple effects that end up affecting firms over the long run. This is why Tang (2006) indicates that supply chain disruptions can have negative effects over the long term on the financial performance of firms. Tang (2006) further states that there is a tendency for supply chains to break down during major disruptions and in most cases they do not recover from it. These are some of the risks that firms face in sourcing supplies overseas. These disruptions not only affect firms that require these goods and their customers, they also affect the operators of these transportation. There costs can be quite high as the number of trips that they are able to make each year would be reduced. This would have a negative impact on revenues. Additionally, the least competitive operators would be forced out of business. This would lead to less competition and result in increased transportation costs and therefore increased supply chain costs. Tomlin (2006) indicates that there a number of strategies that can be employed to deal with these risks. These include mitigation strategies and contingency strategies. Some of the strategies suggested by Tomlin (2006) include: business interruption insurance – a form of financial mitigation, inventory management and sourcing – two forms of operational mitigation; and rerouting and demand management – two forms of operational contingency strategies. Firms can use whichever one or a combination of these strategies depending on their particular circumstances. However, Tomlin (2006) points out that there is a cost involved in taking mitigation and contingency actions and so firms sometimes wait until the event occurs before making a decision on their next move. In fact, Snyder et al (2006) points out that firms have been very reluctant to invest in additional supply chain infrastructure and inventory despite the fact that they can obtain large payoffs in the case of such eventualities. Choosing the appropriate strategy In deciding on the right supply chain strategy cost and customer satisfaction needs to be taken into account. Tang (2006) states that robust strategies need to be developed in order to motivate firms to ensure the security of their supply chains. Tang (2006) suggests that these strategies should serve two purposes - they should be able to help firms to reduce cost and improve customer satisfaction; and they should also enable the sustainability of the operations both during and after the period of disruption (Tang 2006). Lee (2004) suggests that a useful strategy is to use different supply chains for different lines of products. Highly customised products that are required in relatively low volumes could be sourced from suppliers that are in close proximity to the firm’s main market. In terms of high volume products suppliers from low cost countries should be sought. Additionally, in the case where components can be standardised, this should be done in order to create flexibility (Lee 2004). Wisner et al (2012) ndcates that a supply network that is driven by demand should have the necessary flexibility to respond quickly to changes in the market place. This is what Lee (2004) describes as adaptability. The mode of transportation would be decided based on: the type of supplies – perishables or non-perishables; the volume in which the supplies are required; how quickly it is required after the date on which the order is placed; and the distance of the supplier from the firm. Additionally, the relative cost of the different means of transportation should be compared. Furthermore, the level of CO2 emissions will have to be factored in. This is an area which is gaining increased attention due to the effects of emissions on global warming. Pollution has a cost and even though it may not cost the firm directly it has cost implications for the society. As a result of this Eriksen (1999) describes them as external effects. The impact of new environmental regulations The new environmental considerations would definitely have an impact on the transportation of goods between regions. According to Shrivastava (1995, p. 183) the natural environment is ‘an important arena for economic competition’ as issues relating to ecology such as ‘energy, natural resources, pollution, and waste offer both competitive opportunities and constraints, and are changing the competitive landscape in many industries. Competition among firms is affected by environmental regulations and standards that impact the cost of carrying out business activities. These have resulted in firms taking steps to become more energy intensive. Additionally, some customers take environmental issues into consideration when choosing a supplier. Therefore, they look at how the firm transports its goods; how production is carried out in terms of the transforming of raw materials into finished goods. It is a costly process to use environmental friendly technologies and although it results in increased costs to the supplier and therefore the customer, the cost to society from not doing so could be greater. In fact, Shrivastava (1995) indicates that environmental technologies are evolving in terms of techniques and management orientation. Aircrafts are now being designed to cause less noise pollution and to use less energy – become more energy efficient. Trailers and trucks as well as ships are also being designed in such a way that they use less fuel and emit fewer pollutants into the environment. References Elkins, D., Handfield, R.B., Blackhurst, J and Craighead, C.W. (2005). 18 ways to guard against disruption. Supply Chain Management Review, 9(1), p. 46-53 Erksen, K.S (1999). Calculating External Costs of Transportation in Norway: Principles and Results. Presented at NECTAR Conference in Delft Juttner, U., Peck, H and Christopher, M. (2003). Supply chain risk management: Outlining an agenda for future research. International Journal of Logistics: Research and Applications, 6(4), p. 197-203 Lee, H.L (2004). The Triple-A Supply Chain. Harvard Business Review on Point Article, 2004, p. 1-12 Rice, J.B and Caniato, F. (2003). Building a secure and resilient supply network. Supply Chain Management Review, 7(5), p. 22-30 Sheffi, Y. (2005). The Resilient Enterprise: Overcoming Vulnerability for Competitive Advantage. Cambridge, MA: MT Press Snyder, L.V., Scaparra, M.P., Daskin, M.S and Church, R.L. (2006). Planning for Disruptions in Supply Chain Networks. Tutorials in Operations Research – Informs 2006 Shrivastava, P. (1995). Environmental Technologies and Competitive Advantage. Strategic Management Journal, 16, p. 183-200. Tang, C.S. (2006). Robust strategies for mitigating supply chain disruptions. International Journal of Logistics: Research and Applications, 9(1), p. 33 – 45 Tomlin, B. (2006). On the Value of Mitigation and Contingency strategies for Managing Supply Chain Disruption Risks. Management Science, 52(5), p. 639-657 Wisner, J.D., Tan, K.C., and Leong, G.K. (2012). Supply chain management: A balanced approach. CENGAGE Learning Read More