Companies have realized that supply chains can be very vulnerable, not only to disasters, but also to frequent, less-damaging, but unpredictable disruptions. Risk management is therefore not limited to managing against disasters but should also cover lower-level and still potentially damaging disruptions.
When typhoon Ondoy hit the Philippine industry heartland of Metro Manila in 2009, factories and warehouses were flooded, billions of pesos in merchandise were damaged, and electric utilities were hit. Ondoy was a disaster, but typhoons hit the Philippines every year. And although most are not "disastrous," they are enough to disrupt business operations to a costly degree.
It is well and good that firms have prepared themselves against the next potential Ondoy and other possible calamities. But preparing against a natural disaster is only one side of the story. Firms would be well advised to prepare against disruptions that occur quite frequently in unforeseen ways and at unpredictable moments.
Consider the following areas where disruptions can come with significant effect:
Factories and warehouses have vulnerabilities in critical equipment and infrastructure. These vulnerabilities can cause expensive problems when hit.
Steel mills, for example, rely on furnaces that need to remain hot to keep the raw material molten. A failure in furnace equipment would be disruptive as well as costly, especially when it may take days to repair a furnace and reheat it. Steel factories have invested large amounts to ensure equipment have state-of-the-art reliability, but sometimes, they forget to check preventive maintenance programs as well as the supply of gas and ore to keep the furnace running.
Material Supply Source
From some firms' standpoints, vendors don't make much information, including information on risk, available to their clients. The ability of the supplier to assure enough stock of materials needed to make finished products should be taken into consideration.
When Toyota asked its vendors why the latter failed to deliver in a rare instance, Toyota discovered that its direct suppliers or first-tier vendors also weren't receiving deliveries from corresponding suppliers upstream. Toyota thus learned that it would be ideal to assess risk along the vendors' chains as well as its own.
Many firms have outsourced their manufacturing and logistics to contractors or third-party providers, and some have paid the price for not sufficiently assessing the risks. A firm not doing its homework, for example, can mistakenly contract a labor-intensive contractor that would be prone to work stoppages from disgruntled employees.
How a firm plans its electricity, water, and fuel contingencies can determine its disruption risk. A production plant located in a flood-prone area constructed a dike and had electric pumps installed to keep water out of the factory. The plant, however, sometimes didn't stock up on fuel for its backup generators, and when power failures hit during stormy weather, the factory would end up both flooded and without power.
Information technology managers have invested in disaster recovery projects to minimize risk from catastrophic failure of information systems. But firms shouldn't just count on disaster recovery programs for their supply chains' information technologies, because disruptions, more often than not, can come in a form that may not justify a disaster recovery program.
An Internet connection or network outage, for example, can shut down a firm's orders-to-delivery system but would not be covered by disaster recovery. In this case, the key contingency is perhaps a personal computer-based back-up system that can revive operations quickly.
Other External Factors
Shippers that use West Coast ports in the United States have experienced delays in past years due to labor problems at the harbors, or traffic jams from surges in shipments that occur before Christmas. To get around these uncontrollable risks, experienced shippers have prepared contingencies such as developing alternate ports to bring their container vans.
Companies would do well to prepare against disruptions from external factors. Aside from port shutdowns, other examples of external factors include national work stoppages, political rallies, riots, criminal activities, community protests, and even seemingly mundane things such as abrupt changes in laws and government policy, and taxes & fees.
Recent natural disasters have revealed supply chain vulnerabilities. But as much as companies are right in preparing contingencies against possible future catastrophes, there is also the need to plan versus the perennial disruption, which though maybe not as damaging, can still be costly in its effect.
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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