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April 03, 2012

Eliminate, Simplify, Integrate

Assessing Supply Chain Risk

Last January, I wrote that supply chain risk would be at the forefront of firms' strategic plans in lieu of the disastrous disruptions of 2011. Indeed, firms have recovered remarkably. Factories in Thailand are catching up on backlogs of computer hardware orders. The Japanese economy is poised for a better-than-expected recovery from last year's disastrous earthquake, thanks in part to aggressive rebuilding efforts in hard-hit areas.

With economic recovery underway, it's easy for firms to forget what happened in the past. They shouldn't, because whether they like it or not, supply chain disruptions will happen again. Challenges loom on the horizon. Crude oil supply from the Middle East is threatened by war. Stronger typhoons are predicted, thanks to climate change.

I also wrote last January that firms can mitigate future supply chain risk via identification of the weakest links, formulating risk-management policies, having ready alternative options, and preparing the organization for worst-case scenarios.

Defining these requires thorough assessment of business operations. The following are key areas where to focus the assessment:

Supply Sources. Where are vendors located, and what are the potential supply risks? Ford Motor Company, for example, is examining its supply network for vulnerabilities. Ford's paint supply was hit when the Japanese earthquake shut down its supplier of black pigment for automotive paint.

But assessing one's own supply network may not be enough. Some firms are asking their vendors to assess and improve their end of the supply chain. For instance, after the Japan earthquake, Florida-based electronics components manufacturer Jabil Circuit, Inc. met with major Japanese suppliers, to encourage them to develop more sources for parts and raw materials. Jabil also urged the suppliers to stop clustering their factories around their headquarters, because it can put multiple facilities at risk in a disaster. *

Production and Distribution Centers. How vulnerable are production and distribution facilities? No industry probably knows risk better than the mining industry. Mining firms constantly assess risk at facilities worldwide to determine what safeguards are needed or what community relations strategy to formulate. These companies were caught off-guard when Philippine local governments issued ordinances in 2011 that all but stopped mining, despite previous assurances from the national government. These companies are now spending millions on lobbying for permission to protect and continue with their investments.

Transportation Systems and Infrastructure. How vulnerable are transport systems? It is standard practice for Philippine companies to use more than one transport contractor to deliver products. Firms would do well, however, to assess risk due to factors such as inclement weather, road crimes, and higher fuel prices and toll fees. Many small- and medium-sized enterprises are gradually outsourcing a larger share of their transport needs to couriers who are better at skirting traffic gridlock and have better leeway in consolidating shipments to the provinces.

Utilities. How reliable are power and water supplies? Businesses in Visayas and Mindanao are hurting from rotating brownouts due to power capacity shortfalls. Some companies have invested in their own power generating plants to ensure continued supply. Some multi-national firms have resorted to building power plants that are fueled by non-traditional materials, such as coconut shell. The price of the coconut shell sometimes can be more costly than traditional diesel fuel, but the investment would remain viable, especially if the cost of a single shutdown will offset the higher material price.

Assessing risk includes how well firms would recover from a disruption. Toyota, for example, targets to reduce their time-to-recover from six months from two weeks, time-to-recover being the time to normalize operations after a major supply incident. Toyota is thus mapping out potential supply chain risks and putting in place contingency plans to mitigate those risks.

Risk assessments also determine how firms will structure their operations. Some companies would decentralize operations if they find it too risky to have facilities in one place. This is on top of whether it is also best to decentralize to better serve customer markets.

Understanding supply chain vulnerabilities has become a key trend, as companies continue to be made aware of the risk and business impact of supply disruptions. Earlier this year, Noha Tohamy of Gartner research said, "Supply chain should be incorporated as part of every management rotation program to ensure leadership competency across all functions of the corporation."

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 jovy@highimpactasia.com.

* Reference: "Reinforcing the Supply Chain," Maxwell Murphy, January 12, 2012, Wall Street Journal