|Supply Chain: What You May Not be Thinking About|
|by David Landsman, MFG.com|
|Trends Fall 2011|
The earthquake and subsequent tsunami in Japan put into stark relief an overwhelming, but largely un-talked about issue. Most organizations are unprepared for a major supply chain disruption. Companies don’t have supply chain continuity plans, they don’t ask themselves the right questions and basically have a policy of, “I hope that doesn’t happen to us.” If Japan has taught us anything, it should be that hope is not a plan.
What is the biggest risk facing a manufacturing company?
Example: Apple. The major resin used in the battery for the iPad 2 is called Polyvinylidene Fluoride (PVDF). 70 percent of the PVDF market is controlled by the Kureha Corporation in Iwaki, Japan, which is 37 miles south of Fukushima Daiichi. Additionally, Kureha’s export hub was the port of Onohama, which was more or less destroyed by the tsunami. The result of the disruption of the supply locale was that the 30 percent of the PVDF global market not controlled by Kureha became 100 percent of the global market, and customers were thrown into disarray as they scrambled to secure additional supply. Six week waits for the iPad 2 became common as production ground to a halt in the wake of the tragedy in Japan.
Mitigation: Have a backup supplier and if a backup is impossible, consider carrying emergency strategic inventory.
Companies know their suppliers, but who supplies their suppliers?
Example: Major Automotive Manufacturer. At the inception of a program, an automotive OEM sourced a machined part that required a substantial heat treatment before implementation. The OEM did not have good visibility into its total supply chain and a few years into the program, the heat treatment company suffered a major furnace failure that kept it offline for a significant time period, substantially disrupting vehicle production. Bill Michels, C.P.S.M & CEO of ADR North America, says, “While many companies claim to develop risk management strategies to assure shareholders that plans are in place, the reality is that few of these plans are effective. Most companies fail to map the entire supply chain, and they limit their analysis to Tier 1 suppliers. They are essentially ignoring the risks downstream, which are where the potential supply disruption is likely to occur.”
Mitigation: Take the time to map the complete supply chain. Identify risk factors before they occur and have plans in place should these foreseeable problems crop up. The price of the mapping activity will be much lower than the cost of remaining ignorant of avoidable risk.
Is the supply chain too long?
Example: Rapidly Growing Wind Technology Company.
Continuous improvement disruption
Where does supply chain resiliency begin? It begins with not ignoring the fact that companies are suffering supply chain risk every single day. It begins with admitting that most organizations don’t have a plan and recognizing the need to make one.
Resiliency has to begin at the top with the leadership in the organization asking the question, “What are our primary vulnerabilities?”
Many times, after asking that question, the leaders don’t know the answers. It is critical to form a cross functional team and investigate the primary risk factors of the manufacturing enterprise. If an organization doesn’t know where to begin, it is useful to try a simple exercise. Bring in leaders from production, sales, finance and engineering. Ask them a question:
Have the cross functional team add categories they feel are germane to a supply chain risk discussion. Once a comprehensive list of categories has been created, begin assigning a risk value to each one based on team input, with the highest risk categories receiving high numbers and lower risk categories receiving low numbers.
After taking the first step and acknowledging company risk factors, take the next step and begin planning to mitigate them. Start with the highest risk on the board and investigate how the company would manage the realization of that risk.
It is critical during the mitigation planning stage that organizations are realistic in their plans, specifically around business continuity during a natural disaster. FEMA statistics state that 40 percent of small businesses disappear entirely after a natural disaster. A majority of these losses can be attributed to loss of contact with employees and the consequences therein. A company might think it has the most committed employees in the world, but people will realistically think about their families first. Account for this in the appropriate categories.
If leaders feel like the plans they are receiving from the cross functional team aren’t realistic, it is important to push back. “Would this really happen?” is a legitimate question to ask.
Are you measuring the correct risks?
Risk management isn’t for me!
Some organizations think they are too small for risk mitigation planning and feel like hoping for the best is a good course of action, while others are overwhelmed and don’t know where to begin. Whether a two-man company or 200,000, say this out loud: “If _________ happened, we would be completely shut down.” Take that one risk point, break it down and plan what to do if your worst supply chain fear comes to life.
David Landsman is director – strategic alliances at MFG.com. With 10 years of experience in high-volume, low-cost country and domestic sourcing, he is a globally recognized expert on supply chain disruption, continuity planning and risk mitigation. Landsman can be reached at firstname.lastname@example.org, 678.556.2966 or @mfgsourcing on Twitter.