Table of Contents
Abstract
The majority of supply chain interruptions occur as a result of minor deviations from standard operating procedures. For example, inadequate documentation or temperature changes may seem inconsequential, yet they can eventually lead to major disruptions to your team’s productivity, customer satisfaction, and financial viability. Even though we call them minor exceptions, they cause real supply chain risk to your business.
In this white paper, we present some of the best structured techniques that logistics companies can use to reduce overall operational risks. This includes recognizing what causes supply chain exceptions (for example, unanticipated vehicle breakdowns) and tracking the propagation of those exceptions throughout a company’s supply chain. Then, implementing formalized procedures supported by disciplined risk management in supply chain environments.
Why Exceptions Are the Primary Source of Supply Chain Risk
An exception in supply chain management is when something doesn’t go as planned in your original agreement with your business partners. Go for a supply chain risk assessment before you sign or commit to any supplier, locking in routes, promising fancy capacity numbers, or shaking hands on service-level agreements.
Here are some of the typical exceptions:
Time exceptions
late pickup, early delivery, missed delivery window, and extended waiting time during shipment
Quantity exceptions
when you receive less than you ordered, more than you ordered, or when you do not count pallets correctly
Condition exceptions
temperature issues, damage, and other issues related to the package seals on pallets or other types of shipments
Documentation exceptions
incorrect or missing documentation, such as proof of delivery or customs documents
These exceptions create uncertainty, which creates problems for the downstream business decisions that supply chain risk management has been structured to help mitigate in industries such as manufacturing, retail, food/beverage, automobile, construction, consumer goods, and ports.
How Exceptions Cascade Into Systemic Disruption
An inbound shipment that is delayed causes a shift in the schedule of the docks. When the schedule for the docks shifts, labor is pushed to use overtime hours, which compresses the cut-off times for shipping outbound products.
Inventory acts as a buffer to absorb the initial exception. If there are multiple exceptions that continue in succession, the safety stock will be depleted (drained), causing service levels to drop from that point forward. In most cases, finance is the last division to recognize the effects of disruptions when they penalize suppliers, charge back on invoices, charge detention and demurrage, or extend concessions to the customer for the supply chain disruption. All of them are areas of concern that are typically covered during supply chain risk consulting engagements.
Disruption will also escalate when teams operate from disparate understandings of a situation. For example, operations may view the shipment as late, and customer service might still be promising delivery. Meanwhile, finance may be invoicing customers based on the original schedule. At every step in this process, these three actions build on each other instead of mitigating the impact of the first exception.
How Do You Identify Exceptions Before Damage Happens
The ability to quickly identify risks is essential, but simply being able to see them does not mean you will be able to recover from them. In most cases, when a risk is identified, a documented supply chain risk management plan is mandatorily implemented.
When developing effective detection systems, the following types of input data must be taken into consideration:
- Carrier status updates and periodic check-ins with carriers.
- GPS and ELD location events.
- Terminal gate movements and port activity records.
- Warehouse time stamps for arrival, unloading, and departure.
- Advanced shipment notifications and receiving confirmations.
- Condition monitoring data, such as temperature, shock, etc.
It is important to integrate the ability to detect silent events into the way we design detection systems. If the expected updates do not arrive within the time frames specified, we should interpret their absence as an indication that a risk has materialized.
Using predictive estimates of time and availability, along with confidence intervals, can help teams understand how long until they are required to plan recovery efforts based on downstream commitment timelines.
The Art of Decision-Making Under Time Pressure
Determining what situation needs immediate attention and which situations may continue to be monitored requires a process of triage. The triage process is a key element of an effective supply chain risk management system.
To implement an effective triage process, you need to evaluate the following three areas:
The severity of the situation based on business impact
The imminent need to act based on the time remaining to take action
The ability to recover from the situation based on available alternatives
For example, if a supplier misses a shipment but has alternative sourcing options and a buffer of inventory, the company may opt to monitor this situation. However, if the shipment is delayed and there is no buffer and a fixed production schedule, escalation of the situation will be required. Clearly defined decision rules are essential to ensure that excessive reactions do not occur while ensuring that critical exceptions receive attention before the opportunity to recover expires.
What Recovery Looks Like in Practice
Recovering from an operational disruption requires pre-identified recovery options. During a disruption, teams do not have the time or context needed to develop recovery options, which is often a major focus of supply chain risk management solutions.
Usable recovery playbooks should include:
- Who is responsible for recovery?
- The timeframe for taking action.
- What data will be needed to take action?
- Approved corrective actions.
- Guidance on how to communicate with both internal and external organizations.
Many common playbooks address the following common circumstances: missed appointments, temperature excursions, port holds, equipment shortages, and driver-limited hours. Playbooks standardize responses, reduce recovery time, and eliminate conflicting decisions across companies and industries.
How to Prevent the Same Exceptions From Repeating
The primary purpose of a root-cause analysis is to distinguish the trigger events (the causes) of an exception from the accompanying system weaknesses. A trigger event may be a late driver. However, weak scheduling buffers and unrealistic appointment rules are examples of system weaknesses. The corrective actions taken to eliminate exceptions through identifying system weaknesses must utilize process re-design, changes in routing logic, developing carrier performance standards, changing buffer sizes, and improving packaging.
The resulting metrics used to determine a reduced risk of supply chain exceptions would include:
The frequency of exceptions by transportation lane
The time it takes to detect the deviation from established parameters
The time it takes to recover from the deviation, and the cost associated with the exception
As a result, organizations that maintain supply chain stability will regularly review metrics and take corrective actions based on the metrics rather than documentation, especially when the companies are utilizing external supply chain risk consulting services.
How InstiCo Logistics Applies These Principles
InstiCo Logistics is a logistics solution provider that enables businesses and other organizations to plan, manage, and execute freight operations with an emphasis on stability and operational control. At InstiCo, we reduce supply chain risk by providing timely notification of operational disruptions as early as possible.
Some of InstiCo’s key principles of operation:
- Exception identification through the use of updates from carriers, location, and timing data.
- Exception priority is determined by the potential for disruption, urgency of need, and the ability to recover.
- Established recovery plans for purchasing transport products when supply chains are disrupted due to acts of God, equipment failures, lost cargo, etc.
- Continuous review of causes of exceptions to help lower the incidence of similar exceptions in the future.
InstiCo’s methodology ensures that companies can consistently deliver consistent service in all supply chain activities and that they have a competitive edge in their marketplace.
Key Takeaways
If exceptions are treated by organizations as individual events, then the overall supply chain risk will continue to increase. Organizations across all industries will be in a state of operational stability if they can identify deviations early, utilize frameworks for making decisions, and have predefined actions for recovering from those deviations.
By closing the loop with root-cause analysis and implementation of targeted corrective measures, exceptions will no longer have the ability to disrupt an organization’s operations. It is the discipline with which organizations reduce the supply chain risk; it is not the various slogans or tools that organizations have.
Need reliable freight execution without constant exceptions? Talk to InstiCo Logistics.
Key Terms and Acronyms (Glossary)
- Exception: a measurable difference from the operational condition previously planned/agreed, whether regarding time, quantity, condition, or documentation.
- Supply chain risk: the risk of a supply chain adversely impacting an organization’s ability to maintain continuity of operations, control costs, provide acceptable levels of service, and ensure compliance.
- Exception management: the process of identifying, prioritizing, responding to, and gaining knowledge through operational exceptions before they become larger problems in a systematic way.
- Recovery window: the time remaining to take corrective action to minimize the chance of an exception resulting in downstream (definitely) irreparable damage.
- Root cause analysis (RCA): an examination of the system that looks at its weaknesses rather than just the initiation or cause of an exception.
