Procurement in the world of Butterfly Effects
Hi there, again! Blogging is addictive isn’t it? And in a way that it can make you feel guilty for being late on the regularity. But thankfully, I have an exciting thing to talk about, which hopefully makes up for the delay – and this time it’s to do with chaos theory.
The laws of nature are very mysterious and all of us who are directly coping with them on a day to day basis would feel humbled by how little does really a lie in our control. Weather scientists and Geologists spend years studying how as humans we can prevent things from going wary – something that we Procurement and Supply Chain Managers can take a leaf out of. We talk about risks day in and day out, and we read it in each and every publication that’s out there in the industry. So let’s get deeper and touch upon the minuteness of what kind of Butterfly Effects can supply chains be affected by.
These seemingly unrelated effects – that lead to major losses and consequences – can be climatic as well as technological. The recent Tsunami wash-out in Japan left various manufacturing industries in a major disruption. Similarly, in Europe, when volcanic clouds gathered, air freight movements were blocked affecting multiple industries and service providers. In Bangkok, Honda cars were submerged in water due to flood. Coming to a more technological example, a similar supply chain disruption could be caused by a human error in entering data in an ERP system that is used to streamline demand generation of parts and sub-parts tagged and coded in a certain manner. A minor error of a single digit can lead to huge loss of opportunity or a huge wastage.
The two main theoretical ways of handling butterfly effects on supply chain are – by way of Insurance (also known as interruption-insurance) and by way of Operational initiatives. Insurance strategy is fairly simple and followed as a protocol in high-risk procurement. Under Operational initiatives, one could either follow a Redundancy Approach or Resilience Approach. Having extra stocks would be an example of a redundant approach which is very safe, but usually also very costly. It can moreover prove to be a huge wastage if the ‘dreaded event’ doesn’t ever occur. A resilience approach on the other hand is more dependent on the category, alternate availability and also the competitive environment expected in such a situation. The strategy will depend on various dynamics and if-but analyses that every procurement leader and supply chain leader in a critical industry will have to conduct.
As we begin to master the natural world further through technology and highly complex forecasting systems, we ought to not lose sight of our own continued vulnerability to human error and nature’s might. But as they say, come what may, the show must go on! So in the spirit of continuity, resilience and preparedness, the Procurement Heroes will be expected to have a magic wand for everything, including – butterfly effects.