In the aftermath of the recent earthquake and tsunami in Japan, there has been significant concern with the economic impact of product supply disruptions to both local and global businesses.

Few industries have been spared from the supply shortages of components, ranging from semiconductor chips to metal forgings and rubber. Toyota and Honda have shut down temporarily within Japan; Apple may see delayed shipments of the recently released iPad 2; and Boeing's new 787 Dreamliner could see further delays to the already-beleaguered aircraft program.

Companies are mobilizing their supply chain risk management teams to assess and mitigate the potential impact of the disasters as the events continue to unfold.

Although many companies have taken some steps to manage the initial consequences, the long-term effects of the earthquake, ranging from commodity price increases, damage to critical infrastructure, as well as health and safety concerns, will have a lasting impact on global supply chains.

Companies with immature risk management practices will struggle to establish a systematic approach to coping with these consequences. Those with a mature risk monitoring function will "sense and respond" to issues as early as possible, minimizing the impact on end customers.

Most large companies have some form of disaster recovery and business continuity plans in place to address major supply chain disruptions. What differentiates leading companies is the quality of the crisis plans and their ability to execute them with agility; no two crises are the same and creative thinking in real time is critical to success.

All that said, as a company in the middle of a crisis, you are faced with pressing questions on what to do now, regardless of your level of plans already in place. Managing through a crisis is a bit like operating in a "fog of war" in terms of the levels of ambiguity and misinformation involved. Putting in place some fundamental operating practices can help your company meet objectives sooner and more efficiently.

Since the disasters in Japan, we have been in frequent contact with our global customers, working with them on strategies to mitigate and recover from these unprecedented disruptions. Most companies agree that the ramifications of the disasters have yet to be fully understood.

Supply chain risk management teams were deployed to assess and track immediate and long-term consequences. A set of common steps have been taken in response to the event and companies face common challenges when assessing potential risk and recovery scenarios.

Disaster Response

Here are the common steps taken by supply chain risk management groups since the event:

1. Being alerted to the event

Given the scale, it was hard to miss. Most companies agreed that this was not a minor disruption and that their supply chains will likely be impacted.

2. Assessing the safety of employees, customers and suppliers

Supply chain risk groups worked quickly to ensure the safety of employees and their families. In fact, this was at the top of their priority lists. Many companies have reached out to suppliers and customers to express support.

3. Assessing immediate risk scope

Most companies mapped out their supply chains to assess the parts that were potentially affected. However, since many of the firms we spoke with didn't have operations in the areas affected, the effort focused primarily on suppliers and logistics providers. Specific attention was given to single-source suppliers of critical components. Companies realize that the long-term implications won't be fully understood for months to come.

4. Creating a working team

Companies assembled a response team, typically within 24 hours, to conduct a more detailed analysis of the potential disruptions and to identify pre-existing mitigation plans.

5. Contacting tier 1 suppliers

Companies utilized direct communications with critical tier 1 suppliers to gauge the scope of the disruption. Other methods included emails and online surveys that were analyzed for any potential trend.

6. Keeping management involved

Given the magnitude of the event, supply chain risk management groups emphasized management involvement and oversight, typically though daily briefings and assessments.

7. Notifying customers of possible impact

Companies discussed some of the approaches they were taking to keep their commercial organization and customers abreast of possible disruptions to demand fulfillment. They analyzed potential demand prioritization and allocation strategies to manage a possible supply shortage.

Challenges Managing Response

Here are a few common challenges companies have faced so far:

1. Access to up-to-date, accurate intelligence

With competing intelligence sources and expert opinions, companies are struggling to identify reliable sources of information and are relying on public sources. Some companies indicated they rely on their logistics providers for accurate assessments of the local impact.

2. Lack of visibility into sub-tier suppliers

Companies typically rely on tier 1 suppliers to manage sub-tier suppliers. To assess the wider impact of the disasters, they're now striving to gain better visibility into the ramifications on their sub-tier suppliers. Some companies urged their contract manufacturers and tier 1 suppliers to contact their suppliers to try and assess the situation. But in general, this has been viewed as an effort-intensive step, requiring direct conversations and email exchanges. There doesn't appear to be any systematic approach to enabling this multi-tier visibility.

3. Handling single-sourced components

It is still not unusual for companies to rely on one supplier for most or all of their demand for a critical component. Although Japan's importance in the industrial world has receded, it's still home to significant electronics manufacturing, like lightweight flash memory, which constitutes a sole source for many companies in the high-tech and automotive industries. Companies are assessing the implications of single-sourcing critical components across their networks to gauge the likely impact on customer fulfillment.

4. Lack of scenario management and modeling tools

Many companies indicated their need to quickly build and utilize various models to understand possible outcomes and identify mitigation plans accordingly. Companies are looking for tools to help them understand the range of possibilities, depending on radiation exposure and critical infrastructure damage. Most companies look to model best and worst case scenarios, as well as the immediate and long-term impact.

5. Lack of radiation expertise

For some companies, radiation will potentially affect their inbound and outbound transportation, as well as their product and component safety - and it might cause broader environmental risk exposure. Many companies don't have the necessary in-house skill sets to assess and understand the potential implications. They seek trusted experts to paint an accurate picture and advise them on their options.

As the current crisis begins to move toward normality, it's time to re-evaluate the layout of your supply network design to make it more resilient to future catastrophes. This may include designing products that allow more flexibility in supply and manufacturing, increasing long-term alternative sources of raw materials and logistics capability and expanding outsourced manufacturing capacity. It is also a prime opportunity to push for a more robust and funded risk management capability.

There will always be challenges involved with any disaster, but the quality of your crisis plan and your ability to execute on it with agility, will help your organization "sense and respond" to issues as early as possible, minimizing the impact on your end customers.

Source: Gartner