Monday, September 30, 2013

Wind and water, the other side of the tech spectrum

This week's subject is information technology and the influence of cutting-edge software and hardware solutions upon the global supply chain. This is an exciting and very interesting subject area, one that will undoubtedly drive procurement and IT strategy over the next decade.

However, I would like to use this opportunity to explore the far other end of the technology spectrum. If cloud computing and big data analytics comprise the top end of technology, then surely the raw forces of nature comprise the bottom end: wind, mud, and water.

I've been wanting to explore this topic for some time, because it directly dovetails with our discussion and exploration of Lean manufacturing methods. Much was written about this topic in 2011, following massive flooding in Thailand. The "Weather Extreme" blog notes that the Chao Praya, a river which passes through Bangkok, crested at its highest level ever recorded in October of that year. (2) Thailand holds manufacturing plants for Mazda, Toyota, Toshiba and Honda, among many others.(3)

As quoted in Fortune Technology, Bob Ferrari (a supply chain consultant) says: "These recent 'black swan' or unprecedented natural disaster events have obviously exposed vulnerabilities among industry supply chains. The question now is, has the quest for lowest-cost production and hyper-lean supply chains overridden and exposed vulnerability to significant business risk?" (1)

There are two very interesting elements in this quote. First, the reference to the "black swan" concept, and second, the connection between lean supply chains and natural disaster risk.

The "Black Swan" concept comes from work by Nassim Taleb, an expert in risk. According to the New York Times, a Black Swan event has three main attributes: A "Black Swan" is an event that is an outlier according to a traditional probability distribution, has an extreme impact, and one which can be explained in retrospect as a deterministic outcome of some specific sequence of events. Taleb points to events such as the outbreak of World War I and the fall of the Soviet Union as major events that arrived unexpected on the world stage but which carried a huge effect.

Major flooding in a large manufacturing hub could certainly fit this description.

The second important point in the Ferrari quote pertains to "hyper-lean" supply chains. We have learned, in depth, it is key to the Lean philosophy that buffer inventory should be kept at the absolute minimum possible. We were even exposed to tools like the statistical control chart which is explicitly predicated upon the principle that our processes will remain within some "normal" range, and may serve to lull managers into a false sense of security.

A major point stemming from the recent spate of natural disasters ought to be a reevaluation of the lockstep march toward increasingly "lean" design for supply chain and other processes. Here is, in my opinion, the most important question:

Much of the writing about supply chain disruptions has related to commercial companies like Toyota and Honda. Surely, a blip on the income statement of an international automotive corporation is troubling to shareholders. However, we have also read about the push to adopt Lean methods in the healthcare system. If razor-thin inventory buffers truly colonize the healthcare sphere, will we be comfortable with the "exposed vulnerability" that Ferrari mentions above? If we are considering sutures or bandages, can we suffer a multi-week delay as we can with bumpers or dashboards?

(1) "The Global Supply Chain: So Very Fragile." Bill Powell.
(2) "The Great Bangkok Flood." Christopher Burt.
(3) "Black Swan Alert: Low Tech Links Devastate High Tech Supply Chains." Paul Barsch.

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