Managing the supply chain has become the key to successful operations management

Question

Managing the supply chain has become the key to successful operations management. The original reason was economics. Saving $1 in the supply chain is equivalent to an increase of revenue between $1.2 and $2, and the revenue increase is harder to achieve. Next the supply chains became global for greater economic advantage, with lower cost sourcing than ever before.

However, the global supply chain increased every aspect of risk associated with a supply chain. Some years ago my wife wanted to get a Volvo, but there were no cars in the dealerships. The ship from Sweden sank in the Atlantic. The tsunami in Japan caused major disruptions in the electronics and computer manufacturing industries, and not only in Japan but globally. To force a priority in supply, Apple executives flew to Japan with many millions of USD in cash and literally bought the production before it happened. Even now the uncertainty of the Euro is a hazard for American companies. American products are now very expensive in Europe and many US businesses have had contracts cancelled by European partners who are short of cash and are unable to borrow. Even hiring by US businesses has been negatively impacted by the Eurozone crisis.

Discuss some of the possible solutions. The global supply chain is here to stay and there is no withdrawal from the global economy. Some might say rebuild Europe like the Marshall Plan did. But these are independent countries and not the ruins of post World War II Europe. Each one has to want whatever another country can do. And what of China and India? President Sarkozy wanted India to bail out France. As for China, they own much of the debt of both USA and Europe.

Explanation / Answer

The solutions that can be adopted to mitigate the risks associated with the global supply chain can be as follows:

- Knowing the supply chain channel well- the manufacturer should know their suppliers, distributors, and retailers well. Knowing here means being sure of their capability and reputation in the industry and market so that long-term business with them won't be a risk. Analysing their financial stand, their supply chain history and capability to face unfavourable conditions is essential.

- Making clear and good contracts- A global supply chain will be risky due to distance factor. The transactions are difficult to make as dealing from different places is a challenge. If the supplier is not following the initial deal, it is difficult to follow up with him hence proper contracts should be formed with the parties stating all the terms and conditions clearly. Even the rights and obligations stated will help both the parties to function is a healthy way of avoiding the risks.

- Presence of indemnity clauses in the contract- these clauses will help in following the contract and putting the responsibility of the loss or failure of the supply chain on the responsible party instead of the weaker party. These clauses are present in the contract but often understood or poorly drafted. Hence a proper checking of it should be done while forming the contract.

- Having made a product liability insurance- A various number of disputes can arise in the supply chain on the global basis. Having a protection against all such risks can be done through an insurance of the parties before getting into the supply chain. It will help in recovering losses and face the liability caused some risk situation.

- Seeking home court advantage in supply contract- In some conflict, the parties will get involved in a legal procedure which can become complexed and slow for us in the foreign court due to various reasons. Hence opting for home court in the choice of law while forming the contract is essential.

- making sure of organized supply chain activities- Just forming a robust contract will not be fruitful if it is not followed and supply chain activities are not executed based on it. The insurance policies, contracts and any other type of commercial documents need to be followed and preserved in an organized manner so that they can be used in the future at the time of unforeseen risk.

- Forming strategies based on the local conditions of the other party's location- Though we should be opting out the location for all legal formalities but also considering the other location is essential while forming a contract and clauses should be based on it so that they can be followed when conflicts involving both the parties arise.

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