Chain of dominos

According to the chaos theory the flutter of a butterfly’s wings in China can actually cause a hurricane in New York. The occurrence of the credit crisis proves those who support this theory right. We have been aware of this phenomenon in supply chain management for some time now. It is referred to as the ‘bull whip effect’: a change in customer demand is passed on and intensified upstream like a surging tsunami.

Chain of Crises?

But now with the credit crisis, this domino effect may easily occur downstream as well. Mahender Singh, head of research for the Supply Chain 2020 project at MIT’s research institute in Boston, recently made this crystal clear to a large hall filled with supply chain professionals. ‘Liquidity might be a problem for your supplier, which has big impacts in the supply chain. Inventory is going to cost me more. It’s a string of events: from oil prices to trade barriers to a financial meltdown.’

The imponderables are mounting as fuel prices remain highly volatile affecting the longer supply chains of production outsourced to the Far East. Because of increasing transport costs more and more companies are turning to bulk transport. Larger order quantities subsequently result in higher inventory costs. All this seemingly challenges supply chain professionals who are responsible for drawing up the annual budget on behalf of their management board. But it also provides opportunities.

Beth Enslow, analyst at insurance adviser Marsh, says that top managers are concerned, more than ever before, about risks in the supply chain. They want to safeguard their company against becoming the next Mattel or Boeing. ‘The Chief Financial Officers and the treasurer are happy to invest some extra money in order to prevent bad things happening to their brand and being pounded in the financial markets. They don’t want their picture in the Wall Street Journal.’

Now, with today’s uncertainty, the time has come to invest in flexibility: various procurement, production and distribution options. Supply chain professionals can prevent chaos.

Martijn Lofvers is Editor-in-Chief & Publisher Supply Chain Magazine
martijn.lofvers@springer.com