The eruption of Iceland’s Eyjafjallajokull volcano last spring was fascinating for a number of reasons. For example, photos of lightning inside the plume of volcanic ash, such as these seen at National Geographic’s website, are mesmerizing.
More importantly, the ash cloud itself presented significant business ramifications for companies around the world. I believe we will study the volcano’s eruption—and, consequently, the disruptions to supply chains around the world—for years to come because the impact was both so widespread and pronounced.
A recent BusinessWeek article described how automotive manufacturer Nissan Motorwas forced to shut down three auto assembly lines in Japan because the factories ran out of tire-pressure sensors when a plane carrying a shipment from a supplier in Ireland was grounded.
I’ll wager that you expect disruptions from hurricanes and possibly tropical storms, and maybe even a blizzard across the Great Plains. Since those events are likely, it’s smart to create contingency plans that account for alternate transportation routes or even modes. Furthermore, you may even have contracts in place with suppliers for alternate parts, and perhaps even contracts with alternate suppliers for necessary parts or components. But sometimes an unexpected event—like a volcano eruption—disrupts the supply chain. The question then becomes: How will your company respond to this unanticipated event?
Obviously, the first challenge is to realize that an event of some type has occurred or is about to occur. But even more significant, is the response. How quickly your company responds and just what that response is, may have substantial impact on the company’s performance and, possibly, its bottom line.
That’s why it’s critical to have tools and processes in place to respond quickly to unanticipated events that aren’t covered by a mitigation strategy.
- These tools must deliver visibility across the supply chain and provide alerts when an event is imminent, they must also include analytics so users can understand the importance of the event and the impact it will have.
- Secondly, the tools must allow users to collaboratively simulate possible solutions, such as splitting orders, expediting orders and finding alternate sources.
- The next capability may well be the most important. Once simulations are created, they must be compared and contrasted to determine which one best meets corporate goals and objectives. Using a multi-scenario scorecard allows users to compare the possible solutions and measure the impact of each potential resolution on key corporate metrics.
Consider these two possible solutions to a critical parts shortage….
The first solution is to use existing inventory and split apart orders. Customers will not receive their full order, but they will at least receive part of it. A second possible solution is to expedite shipment of parts from an alternate supplier to your facilities, fill the orders, and then expedite shipment to your customers.
The first possible solution results in a decrease in on-time delivery and, potentially, a decrease in revenue for the quarter. The second, however, will result in an increase in cost of goods sold and a corresponding decrease in margin. How do you know which route to take? These results, compared against a given target and appropriately weighted, provide an overall score for each solution. Thus, an analyst can then use those scores to determine which scenario best suits corporate objectives. How you make those quick decisions and how well they align with corporate objectives can make or break a company’s bottom line.
Let me know what you think; either about responding to unanticipated supply chain events or photos of lightning in clouds of volcanic ash.