The importance of managing risk through the supply chain has become painfully evident as a result of natural disasters which have occurred in recent months and years. Despite the obvious human cost and tragedy that ensued, catastrophes caused by the earthquakes, tsunamis, flooding, factory explosions and volcanic eruptions have all impacted enterprises who source globally, and who have embraced Lean/JIT practices at least to some degree.
The supply chain effects of these catastrophes have lead to a JIT rethink, but it is clear that many companies have failed to put in place back-up plans to cope with emergencies like the Japanese catastrophe. They were content to place all their eggs in one basket like Japan or China owing to low production costs while ignoring the obvious risks of natural disasters. But even where companies had a disaster-recovery plan in place, room for maneuver depends largely on the nature of the industry.
The production philosophy born on the factory floors of Japanese car companies is a global management practice and has saved companies billions of dollars. The idea behind JIT, or lean manufacturing, is to have the supplies a firm needs at the exact moment that they are needed. Most of the companies, with production systems based on just-in-time inventory management, understand keeping minimum inventory has its risks.
The problem for many global corporations is that they are mesmerized by cheap production costs in disaster-prone countries. They know the natural disaster risks but feel that their infrequent occurrences on a major scale justify the risks. Nature is not the only threat to the supply chain; there are also significant political risks to be considered in many politically unstable countries.
The rising production costs in China will favor a shift of production back to countries concerned to have a more secure source of supply unaffected by natural disasters. There are, however, other reasons favoring a production shift back to regions close to their markets, like flexibility to react to market changes more responsively.
There are number of avenues open to risk mitigation strategies to deal with large scale disruptions of supply chains, including:
– Challenge suppliers to develop disaster plans so that they can make provisions to move to alternate sites for production, in the event that they are unable to produce product at their main plant.
– Eliminate sole-source suppliers, and developing the capabilities of additional companies. Having one supplier is probably too few, but having five suppliers is too many in terms of achieving economies of scale.
– Analyze where suppliers are located, and limiting the number of critical component suppliers that are geographically situated in a risky area.
– Review insurance policies and consider taking-out contingent business interruption insurance that protects against losses relating to the inability of suppliers to deliver.
Experts have been recommending for years that manufacturers diversify their supply base. After all, recent history is full of examples of widespread supply chain disruptions and their consequences for manufacturers reliant on too few sources, such examples are: attacks to WTC and Hurricane Katrina in USA, flooding in Thailand, factory explosions in Germany, volcanic ash from Iceland and earthquake and tsunami in Japan.
Japanese Earthquake-Tsunami Show Flaws In Just-In-Time
Reducing Risk in The Automotive Supply Chain
Japan’s earthquake must force JIT supply changes
Auto companies relook at just-in-time mantra
Japan One Year Later: What Did Supply Chain Practitioners Learn from the Tsunami?