I thought that from a supply chain perspective, the quake in Japan was bad.  Really bad. Until, that is, I came across this post from the @risk blog.  The post highlights a study from commercial/industrial insurance company FM Global.  The study examines how reliant the companies involved in the study were on China for some or all of their manufacturing and supply.  Some interesting points from the study;

• 86 percent of companies surveyed are more reliant on China than Japan for key product lines
• 83 percent of companies surveyed think supply chain disruption is a moderate or higher risk to the financial wellbeing of their companies
• 94 percent of companies surveyed are concerned about natural disasters in China as a result of the Japan earthquake
• Over 60 percent of companies surveyed are evaluating their supply chain risk in China as a result of the Japan earthquake

The study goes on to suggest you assess your resiliency to a disaster in China by asking the following questions;

1. Does your senior management view resiliency as a competitive advantage and has it made the necessary commitment?
2. Has your organization examined how it can mitigate risk within its products and processes?
3. How well does your company collaborate with its suppliers to assess and mitigate risk?
4. Does your corporation have appropriate business continuity and disaster recovery plans for supply chain disruptions emanating from emerging markets such as China?

A significant earthquake in China is going to happen.  China shares many Geologic features with Japan and a quick Google search shows significant seismic activity including earthquakes over the last several years (2011, 2010, 2009). So, the question is when (not if) will an earthquake hit a major manufacturing center?  When this happens, it doesn’t take a doctorate in supply chain to see that the impact to unprepared businesses will be devastating.  Do you agree this is a concern? What steps are you taking to mitigate the impact of an event like this?  Comment back and let us know.

As most know, Thailand has been hit hard by flooding during this year’s monsoon season. There has been a horrible human cost with hundreds dead, and millions of people affected. What many don’t know is that Thailand is a major manufacturer of hard drives and major brands like Seagate and Western Digital have factories there…thus the price increase for hard drives.  Not only is Thailand a primary producer of hard drives, they also produce components that go into hard drives, so even companies that don’t manufacture in Thailand are affected because they can’t get components.

As you would expect, the hard drive shortage is affecting upstream manufacturers too.  Many companies only have a few weeks of supply on hand and are seeing shipments impacted because they can’t get components.   Fortunately, it looks like the flood waters are starting to recede and some hard drive manufactures will start producing again this month, although forecasts show that high hard drive prices and shortages will continue well into 2012.

From a supply chain perspective, these events have again highlighted the need for companies to implement and maintain a supply chain risk management process. There is much content on risk management, but there are a few key points relevant to what we’ve seen recently;

• Identify key components and where they come from.  If you have multiple suppliers for these components, GREAT!  If these suppliers are in the same geographic region, however, you still can be at risk.
• For your key components, be sure to look at where your suppliers are getting their components from.  Thailand also has significant hard drive component manufacturers that supply hard drive manufacturers around the world.  Even if you source from different hard drive manufacturers in different regions, they all may get their components from a single supplier or region.
• Review your key components on a regular basis.  Many companies do this as part of their S&OP cycle as there is a logical affinity between risk management and S&OP.
• Make sure that you have the tools in place to be able to quickly assess and respond to a significant event like the Thailand flooding. ERP systems and Excel can’t do this fast enough to make a difference.  You need a tool that can model your entire supply chain, allow simulation and reporting to be able to get on top of a fast moving situation like this.

2011 has been another record year for major events with supply chain impact.  Japan is still recovering from the effects of the earthquake and tsunami.  The flooding in Thailand has impacted other manufacturing segments besides hard drives.  Companies operating on a global scale must look at how a regional event could impact their  supply chain.

For further reading, I (and others) have covered Supply Chain Risk Management in some detail over the past couple of years, including a white paper titled Essential Characteristics of a supply chain risk management strategy.  Has your company been impacted by the Japan earthquake or the Thailand floods?   Comment back and let us know

Here’s a small abstract from the paper:

“The ability of ever more sophisticated algorithms to make a perceptible improvement in supply chain performance is nearing its limit. In today’s volatile demand environment, response management solutions present a largely untapped opportunity to maximize profit potential by optimizing day-to-day execution. “

The paper also features response management case studies on Jabil and Aviat Networks.

Here on the 21^st Century Supply Chain Blog, we’re no strangers to volatility. In fact, we’ve been talking about embracing volatility for a while! Here are a couple of posts:

VUCA, a useful acronym for today’s supply chain

Embrace Complexity

1)      “…further standardize parts across Japanese automakers so they could share common components that could be manufactured in several locations”

2)      “…ask suppliers further down the chain to hold enough inventory – perhaps a few months’ worth – for specialized components that cannot be built in more than one location”

3)      “…make each region more independent in its parts procurement so that a disaster in Japan would not affect production overseas”

Step 1 – Standardizing of parts will definitely reduce the risk and reliance on single sourced components. This practice is commonly employed in the electronics industry. However, undertaking this initiative will clearly require more effort as a result of additional engineering efforts to standardize these parts. Given Toyota’s strong reputation in the area of quality (likely somewhat as a result of unique and arguably better design), will corners have to be cut or sacrifices have to be made in the name of standardization? What will the longer term impact be on the brand image should this happen? Remember the Sticky Gas Pedal recall that Toyota went through in 2009-2010?

Step 2 – Asking suppliers further down the supply chain to maintain higher levels of inventory can surely provide an insulating layer against both volatility in demand and short term supply disruptions, however the question is….what is the cost of this and who bears that cost? Traditionally in the automotive industry, larger OEMs and Tier 1 suppliers have a reputation of pushing the cost burden downstream to lower tier suppliers by such methods as imposing penalties for stock outs (line down situations) and applying cost negotiation pressures. Another recent article by Bob Ferrari points to a new study which while referring to these types of behaviors, also refers to a trend of automotive supply chains working to become more collaborative, which in my opinion, is what is needed in times where everyone is being squeezed. Having said that, this article also references the practice in this industry to be very focused on the short term pains, rather than longer term gains that can be realized through investment in technology solutions to enable better collaboration. These seem to conflict with each other. So what is the reality? Truth is that it’s probably a bit of both. I can speak to the fact that I personally know some companies in the automotive industry that are “getting it” and being more collaborative with their extended supply chain, however, I am sure there are many that are still stuck in the past.

Step 3 – Independent parts procurement – This reduces regional risk in manufacturing sourcing however increases the risk of inconsistent quality and reduces ability to leverage overall purchasing power when negotiating supply contracts. Industry trends in supply chain (especially in high tech) are leaning towards more and more companies looking to a centralized procurement strategy that leverages the volume of business they do with suppliers globally to negotiate more favorable procurement terms. This is even true of companies which outsource portions or all of their manufacturing to companies in the EMS industry. This strategy that Toyota seems to be employing is actually the opposite of this trend.

So what is the “right” answer? Good question! While I agree that all the steps that Toyota has outlined will assist in reducing some areas of supply chain risk, the biggest risk I still see is that all these strategies seem to come at a cost which doesn’t have some sort of ROI specifically tied to it….as would be the case with an investment in technology.  So…..what do you think? Is this the right strategy or will this just drive up the cost of the next car you buy? What would you do?

In the article, Boeing and Sharp: Addressing Different Types of Supply Chain Risk, the two companies speak about their changes in strategy. How do you define critical parts that require a second source? The article talks about the effectiveness of focusing on the 80 percent of your spend that typically comes from 20 percent of your suppliers. Does that work? The article debates that it does not and I agree. How many of you have heard about a label shortage affecting a high dollar shipment? Supply chain risk analysis involves a number of criteria. Cost is one, but also the characteristics of the material. Is it custom? Are their capacity limitations with your supplier? Are there currency risks? What is the leadtime? Sharp also talks about regulatory or legislative risks specifically related to solar panel demand. What is the government’s policy on renewable energy? Is there risk that the policy may change?

There is a cost to addressing risk. Typically the senior executives of a company need to approve such decisions. It is recommended that a number of different response management strategy scenarios are evaluated and compared before making any final decisions. This allows the decision to be more objective by understanding the margin or customer service impact of selecting one strategy over another.

The article states that, “Companies that manage supply chain risks effectively will outperform those that ignore or are blindsided by them.” This is certainly true but the wild card is the natural disaster itself. Recently our family cottage was damaged by a wind storm. The damage was not significant but the question was, “Do we submit a claim?” The insurance company advised us that we would lose our 15 percent discount if there is a subsequent claim and the company may not want us as a customer. With the severity of natural disasters increasing, do we anticipate another with more serious damage and not submit a claim now or believe that it may never happen again? This is the dilemma we are evaluating now. Much like forecasts, weather is unpredictable. Risk analysis is paramount with full disclosure within the organization of the supply chain strategy and the assumptions associated with it.

My colleague John Westerveld also wrote a blog recently on risk management called, “Natural disasters aren’t the only risks in town.” What are your thoughts?

A post by “the doctor” over on the Sourcing innovation blog, led me to this article in Industry Week. In it, they present a short case study about how a company survived the chaos and upheaval of Hurricane Katrina, only to fall victim to other risks:

• Rapid growth – Rapid growth sounds like a great situation to be in, and it can be. But it can also cause significant problems. Companies have growing pains just like people do and processes that worked before can become problematic with higher volumes. Suppliers might not be able to grow at the same pace you are and qualified people might not be available to meet hiring demand.
• Expanded and new facilities – New facilities are really systems wrapped in a building and like any system there can be problems getting things working.  As you bring new facilities on-line or as you renovate and expand existing facilities, you need to plan for potential start-up issues.
• Increased and changing product range – Things can be simple when we have one or two products but as the product offering grows, complexity grows with it. Care must be taken when adding new products not to kill demand for existing products, at least until supply has been whittled away.  Apple is a master at this – when a new product is coming, even before it is announced, supply starts to dry up for existing products so that as Apple transitions to the new product, they reduce the risk that they will be left with large quantities of the outgoing product.
• New, large (and more demanding) customers – New customers are wonderful. Large customers, even better! But… there can be a downside. Maybe others have noticed this little truism – the larger the customer, the more demanding the customer. They want what they want, when they want it. And because this customer now makes up a healthy portion of a company’s revenues, the incentive is there to make sure these customers are satisfied.  The risk is that if you have successfully ramped the company to meet this demand and the customer subsequently leaves, you are left with significant excess capacity and expense.
• Changes to the supplier base – Suppliers come and go.  As the supplier base changes, so does the performance characteristics of your supply base.  Quality, on-time delivery performance, lead times, costs, all impact profitability.
• Changes to IT systems – This can be a killer.  IT systems are often the brains of the operation.  If the brains aren’t working, not a lot of stuff can get done.  Companies are often lured into huge projects to overhaul and replace their systems.  If done right, the change can be quite beneficial.  If done incorrectly, the results can be disastrous, sometimes leading to litigation.

The Industry Week article has a number of suggestions for improving a company’s ability to assess and mitigate risks of all kinds. If you were to pick one that you absolutely must implement, it would be to build risk management into all aspects of your business.  Make risk assessment and mitigation a key part of your decision making process.  A good place to start would be to add risk assessment and mitigation to your monthly S&OP process. What better place to ensure that all teams are thinking in terms of what risks exist and how best to manage them?

Have you experienced some of these risks? How did you overcome them? Comment back and let us know.

On its own, the list is quite interesting.  As noted in the article, the 10-K filings were made before the Japanese tsunami.  I would expect that more recent filings would include Supplier/ vendor concerns (#7) and Natural disasters (#12) which would elevate the ratings for these risks.

I also find it interesting to study the risk factors that have gained prominence in the last year.  The table below shows the top five risks ranked by percentage change between 2011 and 2010.

The fastest growing concern is “Inability to maintain operational infrastructure and systems.” Perhaps this is an indication that executives are concerned that they have too many systems and that the systems they have are too complex or too difficult to integrate.

Clearly, the prevalence of world conflicts and natural disasters, coupled with global markets and suppliers, explains the rise of “Natural disasters, war, conflicts and terrorist attacks.” As mentioned above, I would expect this category to be cited even more frequently in 2011/2012 reports.

I find the rise in “Failure to properly execute corporate strategy” fascinating.  From being mentioned in 27 percent of 10-K filings in 2009, it has jumped to being cited in 93 percent of 2011 filings. I wonder what impediments are worrying executives.

It has always been difficult to “Predict customer demand and interest, innovation.”  However, this risk factor is also growing as a concern for executives.

Finally the rise in, “Credit or financial risk of customers, vendors or suppliers” tells me that executives are either dealing with riskier business partners or that the general economic situations is putting more companies at risk.

What is not discussed in the Virtual Strategy article is what companies can do to mitigate the impact of these risks.

I think there is actually a common, underlying theme to these five fastest-growing risks:

Systems supporting key business processes are too complex and too cumbersome to support the rate of change in today’s technology companies.

There is a clear an obvious link between my above statement and the fastest rising risk factor. To my mind, the remaining four rising risks are all related to managing the business despite rapid, uncontrollable change. Current business processes, and the systems supporting them, frequently take a month or more to detect a business-altering change and to change course to adapt to that change (whether the change is seen as a problem, an opportunity, or both). I suggest that new processes and response management strategy are required so that the time to detect and react to change can be shrunk to days, even hours.

For example, following the Japanese tsunami, I have heard anecdotes about some companies launching response teams and securing alternative sources within hours of the disaster. On the other hand, I have also heard of companies, months later, which are still figuring out the parts that are likely to be in short supply and how to select alternative suppliers. Clearly, the latter will have much more difficulty maintaining production in the face of global supply shortages.

What do you think?  Does your company need systems and processes which are simpler to use, more flexible, and more responsive? Do you know of examples where fast, responsive, flexible systems gave you a competitive advantage, or where their absence resulted in serious losses?

Will this problem ever go away? It is argued that if you have brand loyalty then the risk of perishable demand and worried investors is low. This argument holds for Apple where customers are willing to wait. Does the same hold true for BMW when their entire supply of 5 Series was consumed in one month in 2010? Some people just need to get a car. Brand loyalty may not be as influential. Which companies plan for limited supply versus the risk of excess inventory? The article talks about the Kentucky bourbon called Rip Van Winkle. Have you heard of it? Probably not as it is usually hidden behind the counter of the liquor store. They would rather keep production low than risk having inventory. Other companies with short life cycles may do the same. They must get their product to market as soon as possible but cannot risk the bottom line impact of scrapping product when demand is not meeting forecast. There is also the case where limited supply is not planned and can have serious consequences. Canadian company Lululemon faced shortages when their apparel line exceeded expectations and were forced to pay premium freight to accelerate supply. Margin erosion is often a result of demand exceeding supply.

So what does this really tell us? For the most part, forecasts are inaccurate. It has been proven that improving forecast accuracy results in higher customer service with the same inventory or the same service level with less inventory. How do you improve forecast accuracy?  Companies are finding more innovative ways to address this. Many are recognizing that improving demand response will reduce the cost and error of forecast error. Improved collaboration with trading partners; customers and suppliers also improves forecast accuracy. Duncan Klett has written an interesting white paper http://www.kinaxis.com/campaign/demand-planning-reduce-risk-and-impact on Demand Planning where he is really talking about the value of response management in the demand planning arena. He statistically proves that by focusing on customers with high demand variability, reducing cycle time (more frequent demand updates) will improve service and reduce inventory. Collaboration is another component where the sharing of up-to-date forecast information between trusted partners results in improved accuracy and reduced latency.

What are your thoughts?

Large companies have been investing heavily in developing sophisticated response management capabilities to address the volatile nature of demand and supply while minimizing their investments in inventory.  Coupled with Lean Enterprise practices, these companies have achieved distinct cost advantages. I’m wondering if the council shouldn’t be actively promoting methods for small companies to learn and adopt lean practices. Going one step further, perhaps the government should be subsidizing system investments that would help small business be more responsive to the dynamics of the current business environment. The objectives of the Council are laudable and a business environment where small companies can compete and thrive will indeed serve to increase both product and supply chain innovation. Do you have other ideas on what the Council might do to help?

Much has been written in the last few weeks about the impact on the global economy from this disaster. Clearly, it will be a very long time before we know the full impact but there are many realities that companies are dealing with today. “Japan accounts for 14 percent of the global production of computers, consumer electronics and communications gear last year, according to HIS iSuppli.” From an article titled Japanese electronics sector faces extended supply woes. The article also discusses countless factories that are not in production either due to the earthquake or following the tsunami. Many of the companies I deal with are facing this exact problem. In fact, I will be meeting with a customer today who will delay an implementation project due to limited work in their office outside of Tokyo and a destroyed factory in Northern Japan. With tragedies like this and a long recovery ahead, how can these companies effectively plan for the future?

The semiconductor industry has also been extremely hard hit by this disaster. “Japanese suppliers accounted for more than one fifth of global semiconductor production in 2010, when companies headquartered in Japan generated more than a fifth of all chip revenue, $63.3 billion, according to market research firm IHS iSuppli.” From an EETimes article titled ‘Japan quake: Tracking the status of fabs in wake of disaster.’ The article states Japan provides 60 percent of the world’s silicon used to make semiconductors.  So, we are really dealing with all levels of the supply chain in Japan disaster. This impacts electronics companies all around the world and of course the end consumer with possible product shortages or price increases.

My colleague, John Westerveld recently blogged on the topic “Coping with catastrophe. Can your supply chain recover?” In his eerily timed blogged (just two weeks before this disaster), he outlined a few things companies can do to prepare themselves for this type of catastrophe. The customers I am talking to this week who are most effectively dealing with this catastrophe have developed tools that allow them to respond to these types of unplanned events. They have many “what-if” scenarios they are running to determine how to deal with their issues to make the best business decisions.  It may not be perfect, but we all know dealing with supply chain is not perfection.

So, as the weeks continue it will become clear the impact of this disaster on the economy, the human tragedy, and companies’ ability to deal with the unknown. How is your company dealing with this tragedy? Did you have a catastrophe plan?