Japan’s earthquake and Supply Chain Risk Management

 

I delivered a lecture this week to a Risk Management class at the Illinois Institute of Technology on supply chain risk management. (Full disclosure, I teach 2 courses at IIT myself.)  When we set the date up several months ago, I had no idea how timely the subject would be.  The earthquakes and tsunami that hit Japan have not only wreaked havoc on the Japanese people and their economy, but it has far-reaching implications for much of the world.  If your company uses automotive parts, electronics, or lithium ion batteries, you may already have lost some sleep in the last few days.  But even if you are in an industry segment without obvious ties to factories in Japan, you need to be thinking harder about managing risk in your supply chain.

 

This is not our first wake-up call, earlier this year, an earthquake in New Zealand and storms-of-the-century in the mid-west and eastern U.S.  Last year the Gulf oil spill, earthquake in Chile, the list goes on.  Globalization of supply chains only escalates the problem and how many manufacturers or distributors today do not have at least some globalization in their supply chain?  Not many.

 

What are some of the supply chain risk categories that need to be considered?

 

• Natural disasters
• Supplier issues such as labor contracts, quality problems, etc.
• Global shortages of key materials or components
• Product contamination
• Transportation disruption
• Transportation capacity
• Suppliers going out of business

 

You cannot afford to have contingencies for anything that might happen, but the challenge for the Supply Chain organization is to balance probability against cost.  If you expect tight supply of your products in the future, more inventory might be the answer, but at what cost? 

 

A long term multi-year approach is helpful.  If you are in a tight supply situation temporarily, inventory may be the answer.  But if this happens every few years, have you looked for and evaluated alternate sources?  Have you looked at other countries or regions, not just for today but for the future?

 

Here are some steps that you can take quickly to improve the risk management readiness of your business:

 

• Model your supply chain to identify potential risks
• Develop contingency plans
• Document your processes
• Align supply chain and logistics partners
• Collect and analyze information that is available from suppliers, customers, and logistics partners

 

Any comments or questions are always appreciated.