The Japan earthquake and the Thailand floods of 2011 wreaked havoc on manufacturing and logistics facilities in both countries, which led to product supply disruptions around the world.
Damaged Japanese automotive assembly plants and supporting infrastructure, for instance, resulted in a halt in vehicle exports. Thailand automotive operations also had to stop as facilities were inundated by flood waters. Global semiconductor and computer hardware firms, meanwhile, had to revise profit forecasts downward in the wake of supply shortfalls of hard-disk drives and other key components, many of which were being made solely in Thailand.
The earthquake and the floods were not the only supply chain challenges in 2011, however. That same year, China clamped down on exports of rare-earth elements vital to the production of aircraft, computers, and industrial and medical equipment. Mining companies in Australia, China, and Chile were dogged by unseasonal rains, political red tape, costly accidents and environmental protests which resulted in uncertainty in mineral and precious metal prices, not to mention availabilities.
Pacific island countries, meanwhile, implemented tuna fishing restrictions, which caused operational slowdowns at canneries in the Philippines.
And, political upheavals in the Middle East brought volatility to petroleum costs and exports, as they negatively affected drilling and refinery operations.
Executives learned the hard way that their supply chains are much more fragile and risky than they realized. The shutdown of a single source providing a single component can not only disrupt an entire global supply chain but also upset a firmís strategic plans and financial portfolio.
In the aftermath of 2011, managers scrambled to develop contingency plans to avoid future recurrences. Before 2011, firms were focused on making their supply chains lean and nimble. After 2011, they aimed to fortify their supply chains against potential risk.
Though there is nothing wrong in building defenses against supply chain threats, firms would be well-advised that supply chain risk can be best addressed via strategic planning than by knee-jerk reactions. Companies should consider the following when they plan the future of their supply chains:
Seek the weakest link and strengthen it. In the aftermath of the Japan earthquake and Thailand floods, Japanese automakers cranked up production at their plants in the USA and even shipped cars and trucks to Japan to offset lost production capacities at home and in Thailand. For decades, the automakers invested heavily in automotive production facilities around the world, and their strong off-shore manufacturing base prevented further losses through these difficult times.
Formulate policies with risk in mind. Supply chain policies, notably purchasing and inventory policies, can and should incorporate risk. Firms often simply buy or produce more to increase stock levels at any hint of a threat.
The problem is that there could be just as many unseen threats as there are seen. Inventory managers should define their safety stock levels as a buffer against possible sudden supply disruptions, manufacturing managers should build in safeguards and contingencies to avoid surprises from potential risks, and buying managers should work with vendors to define plausible responses to possible threats or disruptions in materials or components.
Have ready alternative options. Some firms already anticipated possible supply cutbacks in rare-earths from China in mid-2011. Long before the Chinese government set lower quotas, firms had the foresight to seek other rare-earth sources to ensure continuous supply.
They found potentially abundant sources in the floor of the Pacific Ocean, in Canada, and in Australia. Public revelations of these sources tempered price increases of rare-earths in late 2011 and even encouraged China to moderate its position on supply restrictions.
Prepare the organization against worst-case scenarios. Organizational development within a firm should include preparations for supply chain risk. Managers and employees should consider training exercises that simulate supply chain disruptions. Training seminars can present scenarios such as sudden, sharp price increases in commodities and discussions on how managers and staff would respond. Likewise, operating standards and manuals should include responses and contingencies against possible supply chain threats.
Supply chain disruptions in 2011 were an eye-opener for companies which forced executives to review their responsiveness to threats. Applying knee-jerk responses would not be helpful; rather, executives would do well if they incorporate supply chain risk in their strategic plans. Any supply chain strategic plan should consider strengthening the chainís weakest links, formulating relevant policies that would mitigate threats, having ready viable options, and training the organization to be better prepared.
Jovy Jader is a consultant and regional speaker on supply chain management. He has directed and implemented supply chain management projects both local and international, which have resulted in company-wide improvements in inventory, total cost, response time, quality, and on-time delivery. Mr. Jader was formerly with Procter & Gamble Philippines and Coopers & Lybrand/PricewaterhouseCoopers. For questions or comments, e-mail firstname.lastname@example.org.
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