The 2000 movie "Memento" features a character who's suffering from an extreme version of short-term memory loss: he can't remember anything that happened to him more than 15 minutes ago. I wonder whether global manufacturers are cursed with the same condition. How else to explain the fact that so many of them were caught short by Japan's earthquake and tsunami? I don't mean that they were unable immediately to shift their sourcing to other countries without any interruption to their supply chains. That would be too much to ask. I'm talking about the lack of any workable risk-management strategy at all.
How many times do we have to keep learning this lesson? In the last decade alone, we've experienced an earlier earthquake and tsunami, a volcanic eruption, a flu pandemic, a West Coast port labor lockout, tainted food, toys contaminated by lead paint, the flooding of New Orleans, a devastating terrorist attack and the worst economic crisis in nearly 80 years. Yet according to Jim Lawton, president and general manager of D&B Supply Management Solutions, fewer than 10 percent of the companies he deals with have contingency plans in place to cope with a major supply-chain disruption. The mind reels.
The biggest cost of Japan's latest disaster is, of course, the terrible loss of human life, still to be determined, from the magnitude 9.0 quake, the resulting tsunami, and the crippling of multiple reactors at the Fukushima nuclear power plant.
While keeping that picture in perspective, it's important to note that the triple catastrophe has also seriously impacted multiple industries, especially high tech, automotive and aerospace. Even the supposedly impervious Apple, Inc. is said to be facing shortages of key materials for its new iPad2 and other popular devices.
Some are doing a better job than others of adjusting to the latest crisis. Honda, for example, is planning to increase production at its facility in the U.K., says Sundar Kamakshisundaram, senior manager of solutions marketing with Ariba. But most of those with extensive supply bases in Japan won't find it easy to ramp up elsewhere overnight. "It's times like this that separates those companies that have their act together from those that don't," says Lawton. "What they did in the first 24 hours is going to determine whether they land in a decent place, or crash and burn."
Even companies that don't have key suppliers in Japan are being affected. A provider far up the chain might be relying on a basic component from that country. (Japan supplies 25 percent of the world's silicon wafers, for example.) What's more, many who were sourcing in Japan are now competing for a limited amount of manufacturing capacity in places like Singapore, Vietnam and Indonesia. Says Lawton: "They really are all interconnected."
Let's assume that you're a supply-chain manager who has finally awakened to the need for a real risk-management strategy. Where do you start? Lawton says companies need to get a detailed picture of their supply chains, well beyond the Tier 1 suppliers with whom they deal directly. If some subassembler relies on Japanese-made microchips, you need to know that. The answer will determine how you distribute your global supply base.
Sole-sourcing can be an effective means of holding down procurement costs and gaining maximum leverage with suppliers. But it also exposes you to a huge amount of risk, warns Lawton. Wherever possible, it's a good idea to funnel some work to an alternative vendor on a regular basis. If Supplier A encounters a disruption, you're in line ahead of all those other companies that are banging on Supplier B's door for emergency parts. "Most of the time," says Lawton, "100 percent of a strategy is the wrong thing. A more nuanced implementation is the one that ultimately makes sense."
Even the best-laid plans won't totally shield a manufacturer from the effects of a disaster. Kamakshisundaram points out that Japan makes many sophisticated components that can't easily be replicated elsewhere. Toyota's hybrid Prius, for one, relies heavily on Japanese-made batteries. (So much for the "labor cost is everything" theory.) Certain shortages are inevitable in the coming months - and so are higher ticket prices for big consumer items such as automobiles.
Paul Martyn, vice president of global marketing with BravoSolution, can understand why so many companies have yet to devise a risk-management plan. "How do you plan for something you can't foresee?" he asks. To that question I would add: How do you sell top management on a costly effort that only proves its worth when nothing bad happens?
In the end, it's all about supply-chain agility. By all means, diversify your supplier base wherever possible. Think about shifting some production out of Asia entirely, and closer to home. But rather than painstakingly prepare for some specific event, which is seldom the one that actually happens, a company might be better off creating an organization that can react quickly to whatever happens. That means knowing precisely which individuals are responsible for executing an emergency-response plan, and equipping them in advance with the tools necessary to do the job.
At the same time, companies need to question the conventional wisdom around concepts such as just-in-time manufacturing and lean inventories. "The zealots that come out with dogmatic statements like 'all inventory is bad' need to go back and review the underlying science of JIT and Lean," says Martyn. "The pendulum is swinging - you're going to begin to see folks building more inventory to stock, and buffering against variability."
Assuming, of course, that businesses really are ready to learn their lesson about the need to prepare for disruptions of any kind. "Supply-chain risk mitigation is an ongoing process," says Kamakshisundaram. "It's not a one-time thing. It needs to be part of the DNA of the business." Don't forget it.
Next: How to assess supplier stability.
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