In A New Age of Supply Chain Uncertainty

Supply chain risk management as a discipline

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The tragedy in Japan has given us all pause. The devastation serves as a cruel reminder of the fragility of all that we have built in our lives, individually and collectively. The scale of the catastrophe, compounded by the still-unfolding events at the Fukushima Dai-Ichi nuclear plant, makes the consequences seem incomprehensible.

And yet, in the immediate aftermath of the disaster, it suddenly became the job of many supply chain executives to make the consequences comprehensible. Senior management — and customers, too — wanted to understand the impact on the supply of parts, materials and commodities in terms of availability, price and lead times. Within those companies with supply chains that stretch out to Asia — that is, for most companies these days — difficult questions were being asked. Or, in any case, should have been asked. Questions like:

  • Which suppliers will be offline, and for how long? Do we even know which of our suppliers have facilities in the affected region?
  • Should we go to new suppliers — or non-authorized suppliers? Will the quake lead to increased instances of counterfeiting of electronic components?
  • Should we increase order quantities, or hoard, in the short term until the long-term impacts of the disaster became clearer? Will our competitors respond likewise, and will that surge in demand drive a margin-killing spike in prices for our entire industry?

In all likelihood, as the aftershocks of the Japan crisis reverberate across the supply chain, many executives are discovering that they do not, in fact, have good visibility into the parts and materials that go into their own products. So when they read that the Shin-Etsu Handotai Shirakawa Plant has shut down, they might not connect that news item with the silicon products that come out of those plants and that wind up in a broad range of electronic components. Yet that one plant is thought to be the source of one-fifth of the total world supply of 300-mm silicon wafers, which are used primarily for making DRAM and flash memory. That is, components that wind up in a broad range of products, perhaps including your products. Perhaps including products that make up a substantial portion of your company's revenues.

The kneejerk reaction to this kind of event may be to call a meeting of the sales and operations planning committee, which in and of itself is not a bad thing. The S&OP group cuts across silos and brings together the major players across the enterprise. But if you don't have the fundamental data that are going to allow the committee to make fact-based decisions, what's the point? If you don't know that you use a certain type of polyethylene in a particular process, and if you don't connect that with the fact that nearly 40 percent of Japan's polyethylene capacity was knocked offline, how can you hope to make a fact-based — or rational — decision about how to respond to the crisis.

This crisis may be a much-needed wakeup call for many supply organizations to dig deeper into their bills of material to understand their vulnerabilities to catastrophic supply disruptions. And for organizations as a whole to refocus on supply chain risk management — not as a response to an event, but as a consistent process, as a discipline.

At the beginning of this year, one of this magazine's Provider Pros to Know, Rory King, director, global product marketing with IHS, Inc., presciently wrote: "Companies must command supply chain transparency and precise visibility to the manufacturers, parts, substances and other commodities they use. To do so gives them agility to respond to economic, customer, consumer and regulatory pressures. It also gives them transferability to swiftly mitigate risk, avoid cost and ensure continuity of supply. Not doing so leaves them vulnerable to avoidable costs from suppliers and to being seen as a keeper of excess or non-compliant inventory. It also exposes them to latent risks such as supplier failures, the use of conflict minerals and hazardous substances, or counterfeit part issues. 2011 will be about transparency, enablement and risk mitigation."

Unfortunately, as Elizabeth Kolbert, a staff writer with The New Yorker, wrote in the wake of the Japan tragedy: "People have a hard time planning for events that they don't want to imagine happening. But these are precisely the events that must be taken into account in a realistic assessment of risk." The past decade has given us, unfortunately, events of such catastrophic proportions that surely supply chain organizations have all the incentive they need to turn supply chain risk management into the discipline it must become to ensure that they can plan for the unimaginable events that seem to become more imaginable all the time.

How has the crisis in Japan affected your supply chain? What steps have you taken to mitigate the impact on your supply? As always, I'll look forward to hearing your thoughts and concerns at [email protected].

— Andrew K. Reese, Editorial Director, Supply & Demand Chain Executive

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