How does an earthquake in Japan temporarily close down four North American auto manufacturing plants? Without parts shipped from their suppliers, auto plants can’t produce cars and dealers can’t sell cars they don’t have.  Disruptions to the supply chain is the business version of the ‘butterfly effect:’ a single event can cascade through the chain, causing chaos with every wave.

Globalization increases access to more suppliers but also increases the chance of supply chain disruption. Domestic suppliers aren’t immune, either: risk can range from government regulation to political unrest to a supplier’s financial instability. All of these events can sideline your business.

Aligning with the right partners can be key to minimizing risk and maximizing mutual success.  “Ultimately, the only way you’re able to grow and succeed is with partnership with others. Choose partners that fuel your growth and understand that each and every day is a chance to take a step forward,” says Brett Thompson, co-founder of Pork Barrel BBQ.

How should you think about ways to protect your supply chain?

Preparation Versus Execution

Preparing for problems isn’t the same thing as solving the problems. Preparation gets you ready, but the nature of the unexpected is that you will still have to respond immediately with solutions to problems you never imagined.  “We’re under the assumption that if we prepare well, we’ll be okay. As much as preparation is important, it’s not everything,” said Arash Azadegan, PhD, an associate professor in supply chain management at Rutgers Business School.

Part of preparation is having a game plan for various scenarios and testing that game plan. Think through what can happen and have several solutions for each possibility.  “A good company recognizes that early stages of disruption are different than later stages of disruption, almost like a decathlon. You do different things in different stages,” Azadegan said. This means recognizing the factors that play into a situation; being flexible and open to considering a variety of responses and solutions; and trusting your company’s leaders with the authority to make decisions on the spot.  They will need the authority to direct responses such as changing suppliers or deploying personnel to a location to file a first-hand report from the field.

Supply chains break down for hundreds of reasons. Top culprits include weather, transportation and labor disputes.  There might be a natural disaster, resource scarcity or cybersecurity issues. Superficially diverse problems share a common result: they affect your business.

One key initial response, Azadegan recommended, is to get ground-level understanding of the scope of the problem so that it can be controlled and contained. For example, shutting down four auto plants because of the Japanese earthquake is likely to inflict substantial losses on an auto manufacturer. But by doing so, the manufacturer might be able to divert supplies to other plants to keep them going, preventing an even larger economic loss and delay of cars to market.

Mitigation Versus Prevention

It’s impossible to prevent supply chain problems, but paying attention to the risks at all times can help mitigate them. For instance, human trafficking is a global problem that affects many industries.  New and promising monitoring systems can help identify human trafficking risks overseas, so that companies can quickly identify emerging trafficking problems and switch to different suppliers midstream.

Trafficking and similar human rights issues have real economic consequences in addition to the universally recognized moral, ethical and legal ramifications.

Even unknowingly using a supplier that depends on this type of labor can turn into a public relations nightmare, undermining corporate reputation with other business partners and brand credibility with consumers. In recent years, the fashion and cell phone manufacturing industries have come under scrutiny for using overseas suppliers that either had dangerous working environments or employing child laborers. That’s why it can pay to use the most advanced technology available to mitigate this supplier risk.

Mitigation also means reacting quickly. Supply chain risk managers should maintain their focus on developing liabilities, giving them precious time to find and implement solutions that will decrease the problem’s impact.

Choosing the Right Suppliers

While no supplier is guaranteed to be risk-free, you can help reduce your risks by finding suppliers with a good reputation who take their credit and financial situation seriously. A company’s credit score can be a basic indicator of trustworthiness.

While no supplier is guaranteed to be risk-free, you can help reduce your risks by finding suppliers with a good reputation who take their credit and financial situation seriously. Tweet This

If you are a supplier, and especially if you are in fast-growth mode, that might mean building your business credit file through a product like CreditBuilder. “Just like your personal credit score matters when you’re trying to buy a house,” said Thompson, “your D&B® business credit scores and ratings can be an important sign of the strength of your company to these large retailers.”

Photo Credit: eric_urquhart, Twenty20