Executive Briefings

Are You Ready for the Next Supply-Chain Disaster?

Each disruption in global supply chains seems to bring a new surprise. On March 31 of this year, it was an explosion and fire at a chemical plant in Marl, Germany. The incident at the factory of Evonik Industries resulted in the deaths of two workers and caused damage that will take all summer to repair.

The human toll was, of course, the greatest tragedy, but there were other ramifications as well. Turns out the Marl plant is responsible for about half the supplies of a resin that is essential to global auto part makers, and growing ever more critical to the industry. Today, plastics account for between 18 and 20 percent of a typical vehicle, versus just 2 percent in the 1960s, according to Grant Gilezan, environmental practice group leader in the law firm of Dykema Gossett PLLC.

"There's a rather small industry right now that is supplying the base material [of resins]," says Gilezan. In fact, Marl plays an even more vital role in global industrial production. Based in Germany's coal-rich Ruhr region, the city is host to the Marl Chemical Park, which produces 4,000 products for some 30 companies within a space of just 2.5 square miles.

It's unclear precisely how disruptive the Marl explosion will be to auto parts makers in the long term. "It threw industry for a loop," says Sheryl Toby, co-chair of Dykema's bankruptcy department. "The supply chain was knee-jerked into quite a crisis-management mode." But original equipment manufacturers and suppliers appear to have done a better job of managing the situation than in other recent disasters. Compared with the aftermath of last year's Japanese earthquake and tsunami, for example, OEMs were better informed about the location of key suppliers, could more quickly turn to alternative sources of raw materials, and had fewer communication problems throughout the chain.

Of course, the scale of the factory explosion didn't match that of the Japanese disaster, but the companies that were affected did seem to have learned some lessons from the recent past. "A significant number of natural disasters have hit very quickly together," says Toby, "and focused a lot of attention on things there were not typically at the forefront." Leading companies have put together response plans and crisis teams that can leap into action - in theory, at least - on a few hours' notice.

Toby says automakers have done a better job than many other industries in shoring up their operations against disaster. But even the most far-sighted manufacturers are still having trouble managing crises at the commodity level. "In general," she says, "it's much harder to get a real handle on raw-material impact and availability." In some cases, as in the steel industry, there might be no alternative source of supply. The only defense is better planning, well in advance of a problem.

So there's plenty of work to be done. Some of it needs to occur at the very start of a relationship between manufacturer and supplier. It's smart to spell out the basic steps that each might take with regard to allocating product in case of a sudden shortage. But Toby cautions companies against being too specific in contract language. "Detailed provisions can work against you," she says. "They could limit you to those [allocations]," even though common law might have dictated a better deal. (Odd to hear a lawyer caution against too much legalese, isn't it?)

Gilezan advises companies to build sustainability and environmental issues into their supply-chain planning processes. New U.S. Environmental Protection Agency rules on emissions standards for PVC plants and resins manufacturers promise to have a major impact on producers of key raw materials - more so than any natural disaster. Companies will have to find sustainable, non-hazardous chemical constituents with which to make resins. They have just three years to comply, and the price won't be cheap. Gilezan quotes estimates of $18m to $20m of capital investment, followed by $5m in annual operations and maintenance costs, per factory.

So on top of the call for greater visibility and communication across the supply chain, we have a need for additional spending on research and development, with an eye toward reducing the cost of complying with new emissions and product-content regulations. Gilezan says companies should be undertaking "strategic sustainability audits," to evaluate how far they must go in order to satisfy the new EPA rules. Often such efforts can be carried out under privilege. Some states have provisions that bar penalties for violations that are uncovered in the course of a company audit. "There are legal agreements that can protect the abilities of otherwise unrelated partners to interact without it being discoverable or subject to agency information requests," Gilezan says.

Don't leave it to your underlying raw-material providers to engage in such exercises alone. If you do, you're likely to encounter some uncomfortable surprises that have little to do with natural disasters - and will have a much more serious effect.

At the same time, companies should assume that the steady parade of unpredictable events will continue. In the first few months of 2012, we've seen earthquakes in Mexico and Indonesia, a tornado that affected a Boeing Co. plant in Kansas, a typhoon in Japan, and labor strikes in Spain and South Africa.

Economies might rise and fall, but there's never a slowdown of disasters that impact global business. All that matters in the end is a company's ability to respond quickly. As Toby puts it: "Those that move the fastest to gain visibility are going to win in the competition game."

- Robert J. Bowman, SupplyChainBrain

Comment on This Article

Each disruption in global supply chains seems to bring a new surprise. On March 31 of this year, it was an explosion and fire at a chemical plant in Marl, Germany. The incident at the factory of Evonik Industries resulted in the deaths of two workers and caused damage that will take all summer to repair.

The human toll was, of course, the greatest tragedy, but there were other ramifications as well. Turns out the Marl plant is responsible for about half the supplies of a resin that is essential to global auto part makers, and growing ever more critical to the industry. Today, plastics account for between 18 and 20 percent of a typical vehicle, versus just 2 percent in the 1960s, according to Grant Gilezan, environmental practice group leader in the law firm of Dykema Gossett PLLC.

"There's a rather small industry right now that is supplying the base material [of resins]," says Gilezan. In fact, Marl plays an even more vital role in global industrial production. Based in Germany's coal-rich Ruhr region, the city is host to the Marl Chemical Park, which produces 4,000 products for some 30 companies within a space of just 2.5 square miles.

It's unclear precisely how disruptive the Marl explosion will be to auto parts makers in the long term. "It threw industry for a loop," says Sheryl Toby, co-chair of Dykema's bankruptcy department. "The supply chain was knee-jerked into quite a crisis-management mode." But original equipment manufacturers and suppliers appear to have done a better job of managing the situation than in other recent disasters. Compared with the aftermath of last year's Japanese earthquake and tsunami, for example, OEMs were better informed about the location of key suppliers, could more quickly turn to alternative sources of raw materials, and had fewer communication problems throughout the chain.

Of course, the scale of the factory explosion didn't match that of the Japanese disaster, but the companies that were affected did seem to have learned some lessons from the recent past. "A significant number of natural disasters have hit very quickly together," says Toby, "and focused a lot of attention on things there were not typically at the forefront." Leading companies have put together response plans and crisis teams that can leap into action - in theory, at least - on a few hours' notice.

Toby says automakers have done a better job than many other industries in shoring up their operations against disaster. But even the most far-sighted manufacturers are still having trouble managing crises at the commodity level. "In general," she says, "it's much harder to get a real handle on raw-material impact and availability." In some cases, as in the steel industry, there might be no alternative source of supply. The only defense is better planning, well in advance of a problem.

So there's plenty of work to be done. Some of it needs to occur at the very start of a relationship between manufacturer and supplier. It's smart to spell out the basic steps that each might take with regard to allocating product in case of a sudden shortage. But Toby cautions companies against being too specific in contract language. "Detailed provisions can work against you," she says. "They could limit you to those [allocations]," even though common law might have dictated a better deal. (Odd to hear a lawyer caution against too much legalese, isn't it?)

Gilezan advises companies to build sustainability and environmental issues into their supply-chain planning processes. New U.S. Environmental Protection Agency rules on emissions standards for PVC plants and resins manufacturers promise to have a major impact on producers of key raw materials - more so than any natural disaster. Companies will have to find sustainable, non-hazardous chemical constituents with which to make resins. They have just three years to comply, and the price won't be cheap. Gilezan quotes estimates of $18m to $20m of capital investment, followed by $5m in annual operations and maintenance costs, per factory.

So on top of the call for greater visibility and communication across the supply chain, we have a need for additional spending on research and development, with an eye toward reducing the cost of complying with new emissions and product-content regulations. Gilezan says companies should be undertaking "strategic sustainability audits," to evaluate how far they must go in order to satisfy the new EPA rules. Often such efforts can be carried out under privilege. Some states have provisions that bar penalties for violations that are uncovered in the course of a company audit. "There are legal agreements that can protect the abilities of otherwise unrelated partners to interact without it being discoverable or subject to agency information requests," Gilezan says.

Don't leave it to your underlying raw-material providers to engage in such exercises alone. If you do, you're likely to encounter some uncomfortable surprises that have little to do with natural disasters - and will have a much more serious effect.

At the same time, companies should assume that the steady parade of unpredictable events will continue. In the first few months of 2012, we've seen earthquakes in Mexico and Indonesia, a tornado that affected a Boeing Co. plant in Kansas, a typhoon in Japan, and labor strikes in Spain and South Africa.

Economies might rise and fall, but there's never a slowdown of disasters that impact global business. All that matters in the end is a company's ability to respond quickly. As Toby puts it: "Those that move the fastest to gain visibility are going to win in the competition game."

- Robert J. Bowman, SupplyChainBrain

Comment on This Article