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?
The biggest risk facing any manufacturing company is a sole source, single factory method of supply for a critical component. Sole sourcing anything should be a major red flag for a supply chain organization, but sole sourcing to a supplier with only one factory is a major roll of the supply disruption dice.

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?
It is impossible to speak to a senior supply chain officer without the word transparency coming up in conversation. Every company in the world wants greater visibility into its spend, but in a roomful of sourcing and supply chain professionals you will find very few who manage their supply base beyond Tier 1.

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?
Bloomberg recently reported that since the beginning of 2010, over $20 billion dollars have been invested in North American automotive manufacturing plants as OEMs pivot to move production closer to consumption. Toyota announced that it will no longer export the Camry to the United States and will instead produce all units in country. Boston Consulting Group recently released a report that indicated the “Asian Manufacturing Advantage” would vanish by 2015. Harry Moser, founder of the Re-Shoring Initiative, thinks it will be sooner than that. MFG.com’s MFGWatch Survey of trending manufacturing data indicates that approximately 45 percent of manufacturing companies have either re-shored manufacturing work to North America or are investigating re-shoring.

Example: Rapidly Growing Wind Technology Company.
An executive mandate was handed down that this company would source molded components out of China to keep tooling costs low. The company found an amazing tooling price from a supplier in Tianjin. Unfortunately, when the components began to arrive they all needed reworking. Costs skyrocketed. The company pivoted quickly to get quality production. They found a North American supplier and when the rework costs were subtracted from the Total Cost of Ownership (TCO,) the company actually achieved a 10 percent savings by re-shoring the work. This is an unfortunate failure on two levels. First, the company didn’t ask itself what the TCO would be if there were quality problems. Second, the company didn’t verify quality in China before taking shipments of the components.

Mitigation 1:
Seriously consider complete TCO before making an offshore buy decision.

Mitigation 2:
If a company does decide to offshore work, it should engage a 3rd party verifications specialist to make sure components meet specification before they travel thousands of miles.

Continuous improvement disruption
MFG.com’s MFGWatch Survey trends data on supply chain disruptions. Unfortunately, over the last eight quarters, an average of over 40 percent of responding companies have experienced a supply chain disruption that resulted in the need to find a new supplier. This may be the most depressing statistic we cover because it shows an egregious lack of planning. It seems like many companies do not take a risk management view of their supply chains, and the result is a constant game of “put out the fire,” rather than a streamlined flow of goods and services.

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?
Obviously, asking the right questions is always important. The latest MFGWatch data has “The Ability to find Qualified Suppliers” as the biggest risk organizations are facing right now, followed closely by product quality, logistics and energy concerns. Only 18 percent of respondents think supplier solvency is an issue. Marsh & McLennan recently reported that 68 percent of supply disruptions take place because of supplier insolvency of some kind. Are companies worrying about the wrong 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 [email protected], 678.556.2966 or @mfgsourcing on Twitter.