Terrorism and the Supply Chain — Strategies for Coping With a Form of Supply Risk We Can’t Ignore

Late last week, my hometown of Chicago was once again in the news (and no, this time it was not because we're sending yet another former politician to jail). Rather my city (and in fact, my neighborhood) was the target of an intended PETN-filled toner cartridge originating somewhere in the Middle East. According to the details of the story, the would-be terrorists used the air freight supply chain as the intermediary for their tidings. While this incident serves as an all too familiar reminder that the world is still at war with radicals intent on harming innocent civilians, it also is a reminder that terrorism is a very significant threat to our supply chains -- and one that few companies are prepared for. Yet there are ways of addressing the threat not only through better supply chain design, but also contingency planning.

An article in World Trade Magazine from earlier this summer offers up the start of a prescription for minimizing supply risk exposure from terrorism. The article quotes Mark Nelson of Savi (a supply chain tracking and visibility vendor) as noting that finding ways of "getting goods across borders as quickly as possible" can minimize the impact of terrorism. One of the rationales for this is that under a specific threat, port shutdowns will bring supply chains to a halt. Another is that tracking mechanisms such as the electronic monitoring and sealing of a container can "communicate with U.S. Customs' information systems, enabling Customs to automatically know whether there has been a security breach -- if not, the trucks are quickly cleared for passage."

What are other techniques for building resiliency into our supply chains to mitigate the impact of supply risk due to the terrorist threat? A few come to mind immediately:

  • Shorten the supply chain when possible -- the shorter a supply chain, the less potential for disruption along its path. Shortening the supply chain may refer to number of tiers of suppliers, overall distance traveled of various parts, components, finished products, etc.
  • If possible, reduce 100% dependence on any one form of logistics model (e.g., air freight, rail, etc.). Develop alternative network design models in the case that any one type of intermodal shipping model is impacted more than others. Granted, this is easier said than done in the case of global sourcing, but if supply risk reduction matters to your organization, this type of move may suggest developing alternative sources of domestic supply to complement global ones
  • Consider the tradeoff between higher total cost through increasing safety stock/inventory and having suppliers "own" additional localized inventory up to the point of production via just-in-time and vendor managed inventory programs. You'll pay for it either way -- in higher working capital costs or on a unit cost basis. But do the analysis.
  • Make your 3PL work for their money -- add consideration and contingency planning around supply chain risk from terrorism to the list of items they must consider as part of the relationship.
  • Buy supply risk insurance (yes, carriers are beginning to underwrite policies in this area for named suppliers, supplies, etc.). These policies often require companies to go through supply chain risk assessments which in themselves can be valuable in the area of understanding global supply risk exposure (including exposure to terrorism).
  • Find a way to become the preferred customer; in the case of an inevitable disruption due to terrorism or another factor, suppliers always go out of the way for preferred customers. Think about ways of consolidating spend, incorporating most favored status into contracts, etc. Above all, back up these strategic and tactical moves by being a good customer (e.g., make sure A/P pays the bills on time, invest frequent supplier performance evaluations and development activities, etc.).
  • As a last recommendation (though it won't do much good to avert a crisis), ensure that your sell-side contracts provide as much protection as possible against a failure to perform or deliver due to acts of terror, terrorism, war, etc.

For enabling technology to drive the above of techniques, Spend Matters recommends that companies invest in a range of technologies including: supply chain visibility systems, e-sourcing tools that incorporate extensive total cost modeling capabilities (and the ability to optimize for different trade-offs), supply chain network modeling and design tools, supply chain scenario planning tools, contract management and supplier information management/supply base management (incorporating third-party news and information feeds).

If you have anything to add to this list of recommendations or techniques or technologies, please chime in!

Jason Busch

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