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.

Four Supply Chain Strategies for 2011

 

We are just two months into the year and oil has hit $100/barrel, inflation has become an issue, and people are still trying to understand how the recovery is impacting their plans for 2011.  A colleague of mine, Ara Surenian of Cadent Resources, published what I thought is some very good advice for companies as they contemplate the emerging issues.

 "Here are four improvement strategies for the remainder of 2011:

1. Collaborate! Now more than ever is the time to actively communicate with your customers and suppliers. Where possible use technology to share data and demand plans. Extend your planning process to include your suppliers. Imagine if you and your suppliers were tied together with a taught string. You pulling on supply prompts your vendors to react immediately to your needs. Collaboration via data sharing and active communication eliminates the natural slack in manual processes that introduce delays and demand and supply volatility and inaccuracies.
2. Become faster. Implement lean manufacturing methods to reduce waste and become more nimble. You want to be in a position to respond quickly. Reducing lead times both internally and externally is critical.
3. Measure. We are big proponents of data based decision making.  As the economy is slowly picking up, you need to evaluate the following to get peak performance from your ERP.
   1. Are your lead times and run times all up to date?
   2. When was the last time you did an ABC reclassification of finished goods and purchased materials?
   3. Take a hard look at your customer service measures. Are there holes in your performance? Often if there are issues inventory is to blame which could mean you have capacity issues or do not have appropriate inventory policies. The new normal dictates a continual review and adjustment of these levels.
4. Refocus. It is a great time to revitalize your continuous improvement efforts.
   1. Assess your top issues, concerns, priorities?  What improvement in these areas would provide the biggest P&L dividend to your business?
   2. Regarding collaboration, put a CI team in place with your major customer or supplier to improve or implement a Collaborative Planning Process.”

 

Cadent Resources offers an excellent “front end” for demand planning and inventory optimization that companies are using today to improve the performance of their ERP system.  If you want to check that out, go to www.demandcaster.com

And if you have any feedback on these suggestions, I would like to hear from you.