Supply Chain Disruptions: Minimize the Effects

The Christmas Tsunami, in the Indian Ocean, gave the world another glimpse of supply chain disruption. Natural disasters, wars, and political upheavals occur regularly around the globe, playing havoc with the flow of parts and goods. Such disruptions are as old as commercial trade itself. The terrorist attacks on the World Trade Center and the Pentagon, in 2001, brought supply chain risk into sharper focus. The attacks caused widespread transportation delays, which resulted in costly inventory shortages and plant shutdowns for many U.S. manufacturers and goods shortages for many retailers. Another major terrorist attack, moreover, remains a real possibility. The non-human effects of the tsunami are not as newsworthy as the human cost and relief efforts. However, many aspects of global production, which we take for granted have been upset by this natural disaster. Combined with the issues of the “war on terror”, the management of an efficient supply chain continues to be a large-scale challenge. (1)

On the morning of September 11th, 2001, the United States and the Western world entered into a new era, one in which large scale terrorist acts are to be expected. The impact of the new era has challenged supply chain managers to adjust relations with suppliers and customers, contend with transportation difficulties, and amend inventory management strategies. Supply chain managers now have added challenges of (i) preparing to deal with the aftermath of terrorist attacks and (ii) operating under heightened security. The first challenge involves setting certain operational redundancies. The second means less reliable lead times and less certain demand scenarios. (2)

As Supply Chain Professionals, we may need to re-visit how the effects of disruptions can be minimized.

1. Insure the risk—if you can
Companies have long been able to hedge or insure certain supply shocks. Treasury departments trade futures and options to hedge the risk of currency fluctuations and price increases for commodities. They buy insurance against electric power interruptions and flooding.As the cost of insurance rises, anticipating and mitigating losses will increasingly be accomplished through a combination of operational moves. The goal is to create a flexible and robust supply chain. Doing so requires a careful balance of speed, efficiency, and risk. A look at several recent disasters suggests how managers can proceed. Click here to see a summary of these results. (1)

2. Cultivate alternate sourcing arrangements
Relying heavily on a single source for a product or for critical components leaves a company highly vulnerable to prolonged and expensive supply gaps. A classic illustration of the problem occurred in November 1998, when Hurricane Mitch blew throughout Central America, destroying roads, bridges, railroad tracks, factories, and other structures. Among the businesses damaged were banana plantations, which accounted for 10 percent of the worldwide crop. Two major producers lost much of their Central American capacity, but each fared quite differently.

Dole lost 70 percent of its 40,000 acres in Honduras, Guatemala, and Nicaragua, or roughly one-quarter of its worldwide production. Because the company had no strategy in place for alternative sources of supply in the region, it suffered an interruption in supply from Central America of more than a year. As a result, Dole had to take a special charge of $100 million for the fourth quarter and suffered a 4-percent decline in revenue. By contrast, Chiquita Brands was able to maintain a steady supply of bananas, despite losing production from its own plantations. It met volume requirements through increased productivity at other locations such as Panama and purchases of fruit from associate producers in the region that were not damaged. So Chiquita’s revenues actually grew 4 percent in the fourth quarter of 1998. (1)

3. Line up alternate transportation
Smart sourcing strategies include backup plans for transportation tieups as well. Proper planning and deft execution of alternative transportation plans can help companies overcome even the worst disasters, as was shown during the days and weeks after the Sept. 11 attacks. The attacks immediately prompted tighter security at U.S. Customs checkpoints along the borders of Canada and Mexico and at ports and airports. This caused long delays at border crossings for several weeks after the attacks, disrupting shipments of critical parts and components into and out of the United States.

The Office of Freight Management and Operations now promotes the deployment of technology and the adoption of best practices to facilitate the smooth flow of goods on the Nation’s transportation system and across our borders. The Inter-modal Freight Technology program conducts operational tests of Intelligent Transportation Systems (ITS) technologies, supports the development of tools to evaluate infrastructure and operational needs at border crossings, and works with our partners to develop standards for exchanging electronic freight data. (3)

4. Help the customer decide what to choose
For much of the past century, companies created fixed product lines that represented their best guesses about what buyers will want. There might have been a little tinkering at the point of purchase—a few add-ons—but by and large the set of choices was fixed. The traditional, vertically integrated operations model, using a standard supply chain, cannot deliver custom products quickly and reliably. It can only provide standardized products and “average” service at the lowest cost.

5. Build in quick response to shifts in demand
It’s easier to influence customer choice when the product is highly modular. But supply chain flexibility benefits other types of industries as well. Consider fashion retailing: Cross-selling or up-selling is far more difficult than in computers, but retailers and suppliers can still gain a competitive advantage by building a flexible supply chain that is able to respond very quickly to shifts in demand (a value network approach).

6. Manage inventory to the “right” level
Once companies experience a disaster that severely disrupts operations, they often increase their levels of inventory. Hurricane Mitch damaged a Unilever facility in Puerto Rico that produced half of the North American supply of Q-Tips cotton swabs. Unilever lost almost two weeks of production, and many of its customers faced stock-outs. Despite this exposure, the company recently moved 100 percent of Q-Tip production to the newly constructed facility. To balance that move, Unilever has increased inventories in North America by 10 percent and made arrangements with barge shippers in case road or rail systems are knocked out of service.

7. Prepare for the new realities
It is a mistake to consider abandoning just-in-time supply practices. In the U.S. auto industry alone, it is estimated that companies have saved more than $1 billion a year in inventory carrying costs by using just-in-time techniques over the past decade. (1) That substantial benefit must be weighed against the cost of any recent plant closings or production delays.

Large-scale disasters remind us that an economy without disruption is at best a utopian vision not reality. No one can predict where the next disaster will occur or how it will play out. No supply chain strategy will eliminate risk, nor should it as the cost would be too high. Where SC managers can excel, however, is to identify, quantify, and prepare for the new realities of risk.

References:

(1) Joseph Martha and Joseph Martha and Sunil Subbakrishna, “Targeting a Just-in-Case Supply Chain for the Inevitable Next Disaster,” Supply Chain Management Review, Sept./Oct. 2002.

(2) Y. Sheffi, “Supply Chain Management Under the Threat of International Terrorism,” International Journal of Logistics Management, 12.2, 2001, 1-11.

(3) Inter-modal Freight Technology Challenges, Concerns and Future Directions, USDOT, Federal Highway Administration website.