Stress-testing your supply chain

A standard practice in engineering and product design is stress-testing. Commonly thought of as an engineering process for determining whether a particular product will hold up under extreme usage, it seeks to answer the question, “How harshly can consumers treat this product before it breaks?” But stress testing isn’t just for hard goods, the practice is also used to test the limits of processes and procedures and is especially useful in procurement, logistics and operations. Operational processes can break just as easily as a plastic toy on Christmas morning.

Supply chains in particular are vulnerable to stress, sometimes from flaws in internal planning and design, and sometimes from external factors. Internally, supply chains are made up sometimes of hundreds of different parts. Multiple potential bottlenecks must be identified, especially in an environment where investments in equipment and software are moving at an accelerated pace and the supply chain continues to take on a global scope. New innovations like blockchain technology, artificial intelligence, and an exponential increase in the volume of related data trigger more potential chokepoints.

Those internal stress points can be identified, re-evaluated and repaired. Externally, factors like new tax laws and tariffs that may bring significant disruption to the supply chain. While it is not likely a corporation can change tax laws or tariffs, the supply chain processes around those factors can be adapted in response to these external stress points. Regardless of the origin of the stress points, stress testing the supply chain is an important, but often overlooked, part of supply chain management. The supply chain may look good on paper – but at what point, and under what circumstances, will it break down?

Two of the biggest bottlenecks stress testing may uncover are in the large volumes of data that exist, which, if not understood and organized, can present a significant roadblock to success. Most companies have a wealth of data at hand, but may not be making full use of it, and that can be a source of confusion. With proper data, procurement becomes more transparent, once the company understands areas such as how much they are spending in each category and with each supplier, and what marketplace and engineering specifications are for those items or services. Without that information at hand, increased costs and a bottleneck can result. Stress-testing can identify how to transform big data into an organized and useful format – and which data is most essential to the process. This can then be used to make better procurement and operational decisions and transform the complex logistics of an extended supply chain.

Nearly every supply chain has a weak link, sometimes there are several. Knowing where those weak links are, and at which points they break down, is the first step towards competitive success through Total Value Optimization (TVO), or the ability to successfully leverage stress-testing to anticipate and meet demand by synchronizing the buy-make-move-fulfill supply chain, to deliver the greatest value at the lowest cost to business. Part of that optimization process is understanding the maturity level of each area, and how it compares with other functions at similar companies. In addition, the stress testing process, as carried out through TVO, will help assess where the weaknesses are in the supply chain. Doing so begins with understanding the maturity curve of areas including procurement, logistics, operations, data analytics, and S&OP capabilities.

Identifying the maturity level of the procurement function, and in understanding how well each step in the process is being executed, is a major part of stress testing – and may help identify areas where the execution breaks down. In addition, testing the level of collaboration across all functions, from development and engineering, to sales, to forecasting – including the suppliers and the entire extended supply chain – also presents special challenges because doing so requires dealing with multiple organizations.

Stress-testing requires a sophisticated level of expertise, but done correctly, it helps the organization understand that their investments are going into the right places.

Other areas of stress testing include looking at the steps involved and how they are being executed, and finally, the level of collaboration and integration between all functions, both internally and externally.

A common bottleneck and source of delay in nearly every sales and operations planning (S&OP) process is forecast accuracy. In logistics, warehousing and distribution, forecasting is essential for planning, and with an inaccurate forecast severe bottlenecks may result if capacity has been underestimated or overestimated. For logistics to work correctly, forecast information must be accurate, to determine things like lead time and production time.

Additional bottlenecks coming from external sources may include new tariffs and a trade war, which would likely cause manufacturers to have to re-evaluate supply relationships, negotiate new shipping and transportation deals, and deal with changes in demand. Depending on which side of the tariff the manufacturer finds themselves, they may experience decreased or increased demand, and both can be equally devastating – and the domestic steel industry for example, may face the prospect of increased orders, but may be unprepared to meet the demand.

Stress testing, and understanding the maturity level of each process, has grown increasingly important especially with the acceleration of change in most organizations. With the proper approach to stress-testing, the supply chain becomes more than just an abstract grouping of processes and sources, it becomes a meaningful and strategic competitive weapon.

Steven Bowen is the Chairman and CEO of Maine Pointe, and the author of Total Value Optimization: Transforming Your Global Supply Chain into a Competitive Weapon. He has thirty years of P&L experience, leading turnarounds, high-growth businesses, and Fortune 1000 companies.

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