DC Velocity - July 2013

impact of something like the eruption of a volcano (think of Eyjafjallajökull in Iceland, which disrupted European air transport) is relatively easy. This is because alternative transport modes can still operate, although initially they will be constrained by capacity and time issues, and there are relatively few secondary impacts.

Modeling the effects of a wider disaster is much harder because today’s multitiered supply chains involve so many “layers” of suppliers and subcontractors, some of whom dominate their product niches. Consider the secondary impacts of the March 2011 Japanese earthquake, tsunami, nuclear plant breakdowns, and power shortage. Few people knew, for instance, that the market for the resin that bonds microchips in smartphones is almost a duopoly between Mitsubishi Gas Chemical and Hitachi Chemical, both of whose plants were damaged. That is why the resulting slowdown in smartphone production came as a surprise to many buyers.

Supply chain design tools can evaluate most nodes of a
multitiered inbound chain. They can assess, for example,
whether it would be better to buy from two different
sources of specialized components, even though doing so
will raise operating costs. Another option might be to
negotiate something akin to an insurance policy, such as
paying a premium for a guarantee of preferential treat-
ment in the event that another supplier fails to perform.
And if your company is a very important customer for one
of your suppliers, you may want to encourage that suppli-
er to open a plant in a completely different geographic
location in order to hedge against risk. To properly devel-
op and evaluate these and similar solutions, procurement
must understand the risks in the supply chain and the
value of any mitigation strategy. Supply chain design tools
help calculate both of those factors and communicate the
results.

7It’s time to renew a third-party logistics contract. It is difficult to revise your supply chain when your company is tied into long-term contracts with third-party logistics (3PL) partners. Best practice, however, is to review your network design every three to five years, which tends to be in line with the length of third-party logistics contracts. Thus, about a year before a contract is scheduled for renewal is a good time to begin reconsidering your supply chain configuration. This gives you time to obtain support for change within the organization and to negotiate contracts for new lanes or locations.

A network review is also timely if you are putting a 3PL contract out to bid. In order to submit accurate bids, potential suppliers need forecasts of freight volumes and

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