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A strong El Niño is coming. Weather experts say there's a high probability that this winter will be marked by heavy rainfall in some parts of the world, and drought conditions in others. Either way, global supply chains will be severely impacted.
The effects will be felt at every stage. Critical raw materials, especially agricultural products, will become scarce or difficult to obtain. (Drought in the Midwest, for example, tends to reduce supplies of sugar, palm oil and guar gum, while heavy rains can cause tight markets in phosphate and potassium-based materials.) Manufacturing operations will be disrupted by shortages of electricity due to drought, or rendered inaccessible by flooding. Transportation routes will be slowed or blocked by high waters.
Floods in Thailand, drought in other parts of Southeast Asia and the more recent flooding from Severe Tropical Storm Etau in Japan - likely the first significant manifestation of this year’s El Niño - have served to teach companies a lesson about the need to be prepared for severe weather conditions.
Most serious supply-chain disruptions come as a surprise. No one could have predicted the precise timing of the earthquake and tsunami that struck Japan in 2011, let alone the chemical explosion that shut down China’s Port of Tianjin and the surrounding area only weeks ago.
El Niño, by contrast, comes with plenty of warning from meteorologists. There’s no excuse for companies to be caught without a solid plan for responding to the condition - even if they can’t be sure of the exact nature and location of its impact.
The winter of 2015-2016 presents companies with a chance to test their underlying philosophy of supply-chain resilience and leadership. Ask yourself this key question: Are you sufficiently motivated to start taking precautionary risk-management measures today? Or do you possess a “diving-catch” mentality, whereby you try desperately to save the day when disaster strikes?
Now is the time to begin your proactive risk assessment, to identify key suppliers in potential flood zones, or raw materials that might be impacted by drought conditions. In addition, you need to be initiating and pursuing a variety of risk-treatment options, such as re-locating inventory, updating supplier records as part of your business continuity plan, qualifying alternative sources of supply, and possibly investing in contingent business-interruption insurance.
An Action Plan Checklist
Here are a few specific steps that companies should be taking in anticipation of El Niño:
Get to know your suppliers. Examine your full array of suppliers worldwide. Then identify those areas that are likely to be affected by El Niño conditions, and build up inventories of corresponding raw materials, components and finished goods from those sources.
Identify alternative sources of supply. Companies that rely on sole suppliers for key products are in a position of high risk. Sometimes that arrangement is unavoidable; more often it can be supplemented by another supplier located in a different geography. (Having multiple suppliers in the same area doesn’t provide much protection against catastrophic events such as the Japan earthquake.) It’s far more effective to engage alternative suppliers early than to beg for product in a crisis, when you have no prior relationship with the desired source.
Be prepared to make changes on the fly. Manufacturing operations are likely to require temporary modifications in location, production methods and technology utilized within the plant. Often companies find themselves scrambling in an emergency to reposition facilities in line with available raw materials, personnel and transportation links.
Establish alternative supply routes. Even under so-called normal conditions, space on ships, planes and trucks can be difficult to obtain during peak shipping seasons. Book additional space in advance, to avoid being hit with delayed deliveries or sky-high prices for emergency capacity, such as air or express freight.
Resilinc has published an impact-analysis brief entitled “El Niño: A Test of CPO Leadership and Your Supply Chain Resiliency Culture.” It provides a primer on El Niño from a supply-chain perspective, and tells companies what to expect for the 2015-2016 season. It concludes with a checklist and action plan that chief procurement officers (CPOs) can use to assess the state of their resiliency efforts.
The message is clear: for CPOs who have failed to prioritize supply chain risk-management capabilities for their organizations, the coming months will prove challenging. For those who have prepared, global supply-chain disruptions will be seen not as threats, but as opportunities to gain competitive advantage.
This year’s El Niño will serve as a test of your risk-management and resiliency leadership and culture. If you get blindsided by this event, you’ll have no one but yourselves to blame.
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