What Happens When the Supply Chain Breaks?

April 1, 2011
In extraordinary times, ordinary supply chain practices aren’t good enough.

We’ve reached the point where we need to retire the expression “perfect storm,” especially when it is used as a way of adding some gravitas to otherwise banal business issues. What’s happening in Japan right now—the result of a truly horrific combination of earthquake, tsunami and nuclear meltdown—renders any attempt to overdramatize ordinary commercial challenges as painfully trite. As Masami Yamamoto, president of conglomerate Fujitsu Ltd., told The Wall Street Journal recently, Japan is facing its biggest crisis since World War II. And that crisis could have major supply chain implications throughout the world.

While the shortage of crucial auto parts has been well publicized (Toyota alone is reportedly losing $80 million per day because of supply shortages), of equal concern is the impact the disasters are having on Japan’s electronics industry. As Paul Bjacek, a lead researcher with Accenture, explains, “There is growing concern about the continued availability of printed circuit boards and silicon chips because of raw material, infrastructure and logistics problems.” Japan, he points out, supplies 90% of the epoxy resins used to manufacture the circuit boards, which are used in virtually every electronic device.

And that’s just the tip of the iceberg, reports Alan Tonelson, research fellow with the U.S. Business and Industry Council. Many more American industries are vulnerable to production disruptions resulting from the earthquake, he points out, including industries that use process controls, diesel engines, ball and roller bearings, and motors. “Such disruptions,” he says, “could greatly slow America’s already sluggish economic recovery.”

Brad Feuling, CEO of consulting firm Kong and Allan, was in Tokyo when the quake hit, and saw the infrastructure damage that could take from weeks to months to rebuild. One concern he shared with me is that if companies believe they have insufficient inventory, as many of them no doubt will, they could end up overcompensating with excess production, which will result in too much inventory over a longer than expected period, Feuling says. “Likewise,” he adds, “if inventory is perceived to be adequate to cover short-term demand, lower than required production may occur over the ensuing weeks, creating a future lack of inventory, which will further the supply chain strains, as the supply chain itself will take weeks and months to recover.” As Gary Lynch, head of supply chain risk management at Marsh, sees it, “Multinational companies need a thorough understanding of their supply chain, including the markets they sell to, the suppliers they rely on and the critical dependencies that exist along the supply chain. Effective planning can sometimes make all the difference whether a company survives or not.” So with several decades of supply chain management practices under our belt, have we learned anything about how to cope with the ultimate in supply chain disruptions? Bob Parker, group vice president with IDC Manufacturing Insights, offers the following recommendations:

Modernize supply chain response management. Hearing auto industry executives say they’ll have a better handle on the situation “in several weeks” should send up a huge red flag, Parker says. While nobody can foresee disasters, companies now have the technological capabilities to respond more quickly when necessary. But having the technology and knowing how and when to use it are two very different things.

Go deeper with supply chain risk assessment. Parker echoes Accenture’s Bjacek by pointing out that while at first glance the electronics industry seemed to react quickly to possible shortages, some key component and material shortages further up the supply chain could ultimately lead to severe disruptions. Companies need to get better at seeing the big picture.

Reassess global supply networks. Stop chasing low-cost labor around the globe, Parker suggests, and instead start thinking in terms of systematically locating production closer to end customers.

Develop better supply/demand contingency models. Parker points out that while it’s of course important to map out a plan to deal with lost capacity/lost demand due to the Japanese disaster, don’t lose sight of the unrest in the Middle East, which has global implications of its own on a different scale.

Japan’s recovery will depend largely on its ability to quickly rebuild infrastructure. U.S. companies impacted by the crisis will need to manage their global supply chains from a strategic, big-picture perspective. This is not the time for relying on business- as-usual practices.