Reducing Supply Chain Risk

Tsunami Evacuation Route

Who would have thought that the Japanese industry could be brought to a halt on the scale we saw following the earthquake and tsunami of March 2011? The impact on the stock market was catastrophic, with some of the world’s biggest brand names being hit with unfathomable force; Sony slumped 9.2%, Mitsubishi Motors were down 11.8% and Toshiba and Hitachi both plunged more than 16%.

Clearly an earthquake of this magnitude is fairly rare. It was the double impact of the earthquake and the subsequent tsunami that led to the shutdown of nuclear power stations and was the root cause of the manufacturing problems. But it happened once and may well happen again, like the recent floods in Pakistan, mud slides in China and earthquake in New Zealand. Whether these events are becoming more common or not, the fact is that the interconnected nature of global supply chains and JIT influenced stock levels mean that we feel the effect like never before. So should we put it down to isolated acts of God and go back to business as usual? Or should we work to make our supply chains more resilient in the future and reduce the risk of serious disruptions?  The answer is simple: we need to be ready for such events and work harder to increase supply chain resilience all over the world.

Japan is one of the world’s manufacturing powerhouses and has pioneered a successful process of lean production, promoting the concept of running very efficient supply chains with little or no stock- often sourced from a single supplier. But this leaves them particularly susceptible to the slightest fluctuations in circumstance. Direct sourcing plus minimal stock holding equates to feeling the immediate impact of any unforeseen disasters. Large random fluctuations simply cannot be absorbed within such a lean supply chain. When this type of system is forced to shut down, supply chains very quickly grind to a halt. Not only do the manufacturing plants close down, but the factories that produce the parts for manufacturing machinery are also shutdown. This effectively doubles the impact on the supply chain.

Interestingly, while a lean supply chain may be more vulnerable, it may also be faster in bouncing back.  One of our clients in Japan reported how the improved inventory control, forecasting and planning resulting from the supply chain improvements The Logistics Business has worked on over the last few years, made them better able to cope when part of their distribution network was knocked out by the recent events. A responsive supply chain with high visibility is more resilient.

So what strategic steps can be taken to reduce our vulnerability? There are a number of options here. Multiple sourcing is one. A policy of using two or more suppliers for products and services prevents reliance on any one supplier in the event of a disaster such as the one seen in Japan. It encourages competition between suppliers, and ensures access to a wide variety of goods and services.

Reciprocal deals are another possible solution, where manufacturers share tooling and designs, enabling them to take over from each other if one manufacturer is forced to close down production. This kind of flexibility is important for areas that rely so heavily on Japan’s lean production model and are likely to be affected by natural disasters.

A further option would be to set up specialist manufacturing plants that can be used to make anything; a kind of jack-of-all-trades plant that only functions in the event of a crisis or emergency. Planning and designing these sites would create a back-up or at least enable greater flexibility in crisis situations.

These are all options that need to be taken into account. We have to increase resilience and find ways to minimise the effects of these events, putting in place methods to support supply chains to ensure they don’t collapse, just as buildings can be designed to withstand earthquakes.