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Why a Butterfly Can Destroy Savings Targets

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“When a butterfly flaps its wings in one part of the world, it can cause a hurricane in another part.” This famous quote describes, in simple terms, a small change in one place can cause a big reaction in a difference place. It also highlights what could happen in today’s business environment with global relationships and complex supply chain interdependencies.

There have been numerous examples of this in the past few years. Events like the tsunami in Japan, flooding in Thailand or harbor worker strikes in the US caused immense supply chain disruptions and have had huge ripple effects on production and revenues globally.

The reason is obvious: For many years, companies have been reducing their added-value depth as part of globalization and have been shifting this to external, globally active supply networks (as always, there are also examples for the opposite). This results in numerous new, global and complex supply chains with worldwide business partners, which companies are increasingly dependent on. In some sectors, such as the automobile industry, first- and second-tier suppliers have consequently developed into the real innovation drivers of car manufacturers. “Best-Cost-Country-Sourcing” also leads to new supplier relationships. Business partners are often located in emerging markets where changes in political, macro-economic, as well as infrastructural risks, are extremely difficult to monitor. Moreover, demand pooling activities in procurement have, in turn, led to compressed, highly focused supplier portfolios, which resulted in a continually increasing risk position in the event of a disruption within these supply networks.

A study by Zurich Insurance Group “Strategic Risk: Do Not Forget Your Supply Chain!” investigated the effects of supply chain disruptions based on thousands of SEC reports. On average, the consequences were:

  • 25% reduction in stock prices (effect over 2 years)
  • 9% drop in revenue
  • 11% increase in costs

The upside of “SCRM Leaders” compared to other companies is 14% higher delivery capability! With significant effects such as these, it is no surprise, according to Zurich, that many companies with long-term supply chain disruptions never recover.

Identification, analysis, forecasting and reduction of risks in supplier networks comprise a new task that is, in parts, not yet well-established in companies. The study “ROI of Supply Chain Risk Management” aims to provide companies with a guideline for getting visibility along the entire supply chain, investigates cumulative losses (butterfly effect) in supply networks, as well as the ROI of SCRM.

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