Supply Chain Meltdown

Japan has been hit. The March earthquake, and subsequent tsunami, has wreaked havoc on the country and its people. And the domino effect continues as nuclear facilities explode and fears of a nuclear meltdown increase.

In response to the situation, many Japanese production sites – including refineries, car plants, semiconductor companies and electronics manufacturers – have been closed down, albeit temporarily. Local decisions with global repercussions, these shutdowns immediately led to operational supply chain issues, and may have severe long-term consequences for supply chains. For some Japanese-made products – cars, for example – the final impact has yet to become clear; in some cases, there is still enough supply in the chain, while in others, production can be switched to alternative locations. And, as a last resort, I suppose you could always decide to buy a Lamborghini instead of a Toyota.

For other products, the effects have been immediate. Especially in high-clockspeed industries, such as semiconductors, supplies have dropped by 20 to 40 per cent. In the weeks and months ahead, the disruptions will clearly lay bare one of the key challenges of the globalised supply chain – being exposed to local risks that can have global impact.

But how can you deal with risks on this scale? I have seen inside plenty of companies that have clear strategies in place to cope with local problems – they call it risk management. This is good, but not good enough – it only enables you to postpone a supply chain meltdown for a day or so longer than your competitors.
Over and above risk management, companies should be able to deal with uncertainty in advance; basically, they should build a resilient supply chain through redundancy strategies, through speed in sensing and responding, and ideally a flexible supply chain community. This is what we call risk mitigation.

Setting up a resilient supply chain isn’t rocket science: the concepts are known and proven, the technology is there (and improving) and, in 99 per cent of the cases, it comes with immediate business benefits as you get full, end-to-end supply chain visibility.

So, what’s stopping you from doing it? Are you too busy recovering from the supply chain impact of the Japanese earthquake? Or do you believe that such disruptions only happen once a century, so why bother? To dispel that myth: unforeseen events occur very frequently, both in Europe and around the world – the volcanic ash cloud that grounded hundreds of flights last year, hijackers threatening the Suez route, political instability in the Middle East, SARS, the H1N1 flu virus, and so on and so forth. With a lesser or greater impact, hundreds of events like these happen every year.

To prevent your supply chain from a future meltdown, I strongly recommend you tackle risk strategically – and start mitigating.

Jaap Willem Bijsterbosch, Managing Director at TruEconomy Consulting