Tuesday, January 31, 2012

Supply Chain Disruptions from Natural Disasters in 2011

In 2011, we have experienced a couple of natural disasters that had impact on supply chain performance and risk management.

Due to the earthquake and resulting tsunami in Japan disrupted the automotive supply chain,. Especially Toyota and Honda were majorly affected with supplies extremely affected for months.
Thus, Toyota lost it's tittle of major car producer for the year 2011.
Also, some companies were drastically affected by the disruption from their relative sources. For example, many industries were hit hard by the shortage of obscure chemicals which accounted to be small and still a vital component of their manufacturing process. This was largely sourced from Japan. Most of the suppliers lost their production capabilities for months, manufacturers around the globe were rushing in search of other sources and alternative materials.

Post to the second half of the year the floods at Thailand had an effect on the high tech sector especially the disk industry which was staunched for many weeks. For example, Intel claimed to have lost $1 billion in Q4 sales. The computer OEMs were not buying the chips from Intel as they were not able to source the hard drives needed to make new machines.

I agree with the savants and believe that this is the time companies should once again rethink and revise their supply chain risk management. The companies should be looking beyond their first tier suppliers' suppliers, for improvements.

After almost a year, the awareness among the companies of new supply risks has increased, but there have been to major changes in the supply chain practices. Making changes that cost money for unsure risk which may or may not occur is not popular.

The awareness of new supply chain risks "hasn't necessarily led to action," the Wall Street Journal (WSJ) piece says. "That's partly because boosting inventory even slightly to provide a cushion against supply disruptions can cost big companies millions of dollars, taking a noticeable bite out of the bottom line."

The WSJ quoted the vice president of global supply chain at German genetics-testing company Sean Cumbie saying, as "If we're lucky, [we get] absolutely zero return" from such risk mitigation moves. The implication: often the moves cost money in the short term, and even the long term if certain feared risks never materialize.

Even beyond the potential cost impact another barrier is the time taken to perform the analysis and develop alternative contigency plan. Time is the most crucial factor and is in short for most supply chain executives.
In the HBR, Supply Chain Risk: It's Time to Measure It, states :

Clearly, it is extremely important that a supply chain outsourcing strategy identify risks. But HBR research concludes to have lack of any process to identify, prioritize, manage, and mitigate risks. In the HBR database of hundreds of companies, it was found that most firms ignore risks, sometimes with dire consequences. Their data show that when companies analyze global outsourcing decisions, they fall into three categories. Those who:

  1. add a risk assessment, 10%
  2. look at unit cost plus transportation only, 35%
  3. include inventory as part of the assessment, 55%

In other words, 90 percent of the firms do not conduct a risk assessment when outsourcing production. Yet, sourcing offshore carries myriad additional risks such as political instability, port disruptions, currency swings, demand swings, and more. Unforeseen events occur more frequently in very long global supply chains.

And it's not just the global environment that creates supply risk. There's plenty of it in almost every major initiative. For example, a supply chain professional from a toy retailer told of trying to implement a new fulfillment system that went far over schedule and budget. The Christmas spike exploded before the fulfillment system was complete, resulting in an inability to process orders. People throughout the company worked 50 days straight, including Sundays, to try to stay ahead, yet the firm was forced to send thousands of letters saying, "Sorry your toy order will not arrive before Christmas."

Do you think most companies have made real changes to their practices to reduce risk as a result of recent major disruptions?




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