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The Hurricane in Your Supply Chain’s Future

Posted By Chris Chiappinelli, November 05, 2012 at 2:15 PM, in Category: Global Value Networks

A good friend of mine from Queens, NY, contacted me in the wake of Hurricane Sandy, saying he and his family were doing fine, and asking how we had weathered the storm here in Massachusetts. I should have called him first, since New York City took the greater hit. I had lived in Queens for nearly a decade myself, and I love the pioneer spirit of its people. I didn’t believe the area could be cowed.

Denial is a powerful force. It can steer us away from situations we know are unpleasant, like the damage wrought by a storm or the risk we face as manufacturers in a world of increasing danger. But it’s not a long-term strategy. The manufacturers that thrive in the decades to come will not be the deniers, but those that face up to the risks and adjust. They will acknowledge that the fallout from natural disasters has grown in severity in recent years, and will continue to grow in the foreseeable future.

Wrestling with these suppositions puts us smack in the middle of the political briar patch known as global warming. Even though the evidence continues to mount that natural disasters have grown in frequency and consequence—see Businessweek’s tally of the damage here—partisans of every stripe continue to bicker over the meaning of the evidence as well as the details of who’s to blame. Those squabbles present too much opportunity for denial, and denial won’t get a manufacturing executive any closer to business preparedness.

My advice is to avoid the rancorous debates and simply follow the money to those holding the purse strings: insurance companies. Insurers are the ultimate nonpartisans; they don’t get bogged down in political debates. They employ some of the best brains in the business world, and some of the most advanced technology, to assign a cost to supply chain disruptions. The fact that that cost is rising should tell you all you need to know about your vulnerabilities.

To get another perspective on the issue, I spoke to Siva Paramasivam, senior manager for strategy & operations at Deloitte. In a survey that the firm has yet to publish, the majority of respondents said that their exposure to supply chain risk is increasing. According to Paramasivam, that exposure is a direct result of a confluence of supply chain strategies, which, when taken together, constitute the paradigm of the modern manufacturer:

  1. Globalization: In terms of both customer markets and production locations, manufacturers touch more areas of the world than ever before, and that means they bear the risks that each area presents—hurricanes on the U.S. East Coast, floods in Thailand, tropical cyclones in India, or typhoons in China.
  2. Lean inventories: As I have written before, the race to shed inventory can lead to disaster Lean Inventories Will Make You Pay discussion when a disaster strikes. As companies pursue Lean manufacturing principles and slash away at their working stock, they may do well to recall the true purpose of buffer stock: to protect customer orders (and business revenue) in case of a disruption. In a world of frequent supply chain problems, zero stock is a poor strategy for business continuity.
  3. Outsourcing: As you hand off more of your manufacturing processes to contract manufacturers, their risk becomes your risk, and your company stands at the mercy of their disaster-recovery plans. For some of your smaller supply chain partners, there may not even be a recovery plan. Patching those suppliers’ weaknesses requires your resources and time, and wears away at the cost efficiencies that inspired you to outsource in the first place.
  4. Short product lifecycles: Successful manufacturers can read ephemeral customer tastes, quickly design products to suit them, and spin up supply chains to deliver products posthaste. Such companies manage a much slimmer window of opportunity than their predecessors did years ago. But if a flood wipes out a key supplier just before product launch, the downside can be unrecoverable. If you squander precious weeks at the front end of a short product lifecycle, you don’t have much time on the back end to make up for the losses.

In a recent poll of manufacturing leaders, Manufacturing Executive found that the second biggest driver of executive agita was the desire to better control risks. Couple those results with Deloitte’s inchoate research on the effects of natural disasters, and you might expect business leaders to be pouring resources into disaster-proofing their supply chains and mitigating risk. That’s not necessarily the case, Paramasivam says.

"People are still feeling, ‘There’s only so much you can do about the impact of risk.’ "

But that’s the denial talking. There’s always something you can do. Start figuring out what that is today.

Have you updated your disaster-recovery plan lately? What do you think about the risks to your supply chain?

Chris Chiappinelli is Manufacturing Executive’s online research manager.

Written by Chris Chiappinelli

Chris Chiappinelli is the online research manager for Manufacturing Leadership. He covers enterprise software, sustainability, economic trends, workforce issues, and emerging technologies.

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