Supply chain risk: After the aftershocks, by Jeff Moad

Nearly a year after a devastating 9.0 earthquake and resulting tsunami rocked Japan, scientists are tracking a massive, ocean-borne debris field that continues to migrate eastward. Scientists say the field—2,000 miles long, 1,000 miles wide, and consisting of everything from whole boats to pieces of smashed buildings and tonnes of plastic—will begin to come ashore in Hawaii later this year. It will find the West Coast of the U.S. sometime next year.

In much the same way that this floating debris cloud looms in the Pacific, the legacy of the Tohoku tsunami is still very much with us. The Japanese people and their economy are still feeling the aftershocks. The Japanese economy contracted 2.3 per cent in the fourth quarter, beset by a rising yen, lingering effects of the tsunami, and repercussions of subsequent disasters such as the flooding in Thailand a few months later.

And large, high-profile Japanese manufacturers such as Toyota have yet to fully recover. The company saw its 2011 output fall by 9.1 per cent. Honda’s output dropped by 20.2 per cent.

The ripples are still being felt worldwide. High-tech manufacturers, for example, today are coping with shortages of memory and digital storage devices that have resulted from both the tsunami and the Thailand floods. In a recent survey of 156 global manufacturing CEOs conducted by PricewaterhouseCoopers, 26 per cent said their companies had been affected by the earthquake and tsunami in Japan, and 23 per cent said that, as a result, they have made changes in strategy, risk management, or operational planning.

This means, however, that 77 per cent of manufacturing CEOs say their companies haven’t reexamined supply chain risk or revisited operational plans in the wake of events such as the tsunami in Japan, floods in Thailand, and the 2010 Iceland volcano blowout.

In fact, says Kelly Marchese, a principal in supply chain strategy, manufacturing, and operations at Deloitte, “These events have not had a lasting impact in the way most companies approach supply chain risk management. Although there are notable exceptions, for the most part they’re just breathing a sigh of relief that it wasn’t worse for them.”

Why the head-in-the-sand attitude? It certainly isn’t because supply chains are getting any less exposed to risks posed by things like natural disasters, economic and political upheaval, and logistics breakdowns. Indeed, most supply chains I look at continue to become more complex, more multi-layered, and more global. That means they’re more vulnerable to being disrupted by events such as the Japan tsunami.

But manufacturers are looking the other way for a number of reasons. The first is a focus on short-term costs. Risk mitigation steps such as adding second sources of critical supplies or increasing safety stocks can be expensive. Many companies, it seems, would rather roll the dice on being caught by an unknown disaster than accept the known costs of mitigation.

Inadequate attention in the C-suite is also partly to blame for why supply chain risk management is being overlooked. “Most companies today have very complex supply chains, and no one at the operational level is responsible for the end-to-end supply chain until you go up to the C-suite,” Marchese says. “While boards asked about supply chain risk right after the tsunami, the topic has never really been followed up on at a lot of companies.”

Marchese’s point: Supply chain risk management and mitigation has to be driven from the top down, meaning C-level executives need to own the issue.

So, what should manufacturers be doing to prepare themselves for the next tsunami? For one thing, they should be much more thoroughly assessing the ability of their suppliers—even Tier 2 and Tier 3 suppliers—to respond to unexpected events. And they should be putting into place response plans based on likely or possible disaster scenarios.

Some manufacturers are already doing this. Boeing, perhaps having learned its lesson from a three-year delay on its 787 Dreamliner program that was, in large part, attributed to supply problems, recently launched an initiative to more thoroughly assess the capabilities of suppliers up and down the chain.

Manufacturers should also be diversifying their supply bases. Risk should be one of the metrics that manufacturers use—as well as cost and lead times—when deciding where and from whom to procure key parts and materials.

And manufacturers should be making more extensive use of advanced analytic technologies to both recognize where their supply chains are most vulnerable at any given time and what the financial impact could be. While earthquake prediction is still an inexact science, predictive analytics and visualization tools that can be used to anticipate vulnerabilities are rapidly maturing.

One thing’s for sure: Risk events such as natural disasters aren’t going away. If you’re a believer in the catastrophic potential of climate change, you would have to predict that they will only become more frequent.

And they will become more visible. What I remember most about the Tohoku tsunami was the powerful video of terrible flooding that was beamed instantly around the world. Those images were followed by painful reports on lives lost. And, soon thereafter, we learned in some detail about companies such as Honda and Toyota that were forced to halt production and saw their share prices fall.

Other manufacturing leaders should remember that chain of events and plan for supply chain risk accordingly.

Jeff Moad is executive editor at Manufacturing Executive, where this article was originally published. It has been republished with permission.

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