Like most of us, I have spent considerable time over the past few months trying to follow the latest trends and impacts of the Corona virus pandemic. And like most of us, I often end up overwhelmed and confused by the flood of conflicting information. But amid all the noise, one idea has caught my attention – supply chain stress testing and simulation.
Some have suggested that the government institute supply chain stress testing for business supply chains, particularly those that are associated with critical industries such as pharma and healthcare. They liken this to the stress testing mandated for banks in the US and the EU following the 2008 Financial Crisis. While this concept may have some value, the Federal Government is unlikely to ever be able to understand the breadth and depth of global supply chains at that scale, not to mention deal with the nuances that exist between different industry verticals. That said, however, it does make a great deal of sense for individual companies to develop their own “stress test” simulation models.
Over the years we have come to depend on lean manufacturing and just-in-time (JIT) inventories as critical strategies to drive cost down. But these methodologies design rigidity into your supply chain, making them less resilient to unforeseen disruptions and demand shocks like those associated with the recent Pandemic and the 2011 Fukushima earthquake and tsunami. These crises make clear that, at least with critical materials, we need to make a shift from just-in-time inventory to just-in-case levels. But to do that in a cost-effective manner can be a significant challenge.
Our approach to this begins with taking a new look at how a company segments its inventory. The old “annual units used x unit cost” formula for defining “ABC” classifications is not enough. Inventory items must also include an analysis of brand and product/service criticality and required service levels. After reclassifying inventory this way, the company needs to assess its risk tolerance for each class. This can be in terms of value at risk or some other measure to define the cost of shortage.
At this point, the company can use simulations to enable a sophisticated understanding of the company’s exposure to risk associated with unlikely events. These simulations identify what the company needs to do to ride out baseline, adverse, and severely adverse disruptions. In each case, the time to recovery can be compared to the projected days of supply. Any resulting shortfalls can then be analyzed in terms of the organization’s risk tolerances. This analysis will define the level of just-in-case stock the company should maintain to ensure business continuity and service levels in accordance with the risks it is willing to accept while, at the same time, keeping inventory investment as low as possible.
If you would like to explore this and other supply resilience strategies, please feel free to contact us at info@VertexSupplyChain.com today.