I thought a little back to basics before I continue on detailed topics of supply chain risk might be in order for the readers...and for me as well.
It is no secret that globalization has increased supply chain risk. Along with that risk comes the opportunity to manage it. The opportunities are: site facilities in safer locations or environments, tap into educated overseas personnel, allows for the set up of production centers closer to the sources of vital raw materials and expanding the suppliers and vendors gaps in the supply chain.
The secret is to ensure that the alternative supplier’s facility is detached from your primary supplier’s facility. What would happen if a company procures semi-conductor chips for use in their product and both the primary and secondary supplier were located in exactly the same area - the same earthquake, power failures, same political upheaval would put both suppliers out of operation at the same time.
A prime example of this was in 2005 with Hurricane Katrina. Prior to this companies who were dependent upon the Mississippi River and New Orleans for ocean shipments with multiple shippers thought they were ‘safe’. Katrina exposed the fallacy of that thought process – nothing moved through the port of New Orleans.
So while choosing alternative suppliers is important it must be accomplished prudently. Questions like these must be asked and hopefully answered in the affirmative.
- Do these suppliers receive their electrical power from a different source than primary supplier?
- Do they rely on different transportation systems?
- Do they purchase raw materials from different places?
The more questions like these are answered in the positive the more encouraging will be the business with the secondary supplier.
When calamitous supply chain disruptions do occur a quick response will mitigate the consequences. In order to accomplish this company must have two in place:
- Business continuity plan – covering a range of contingencies such as disaster recovery program, employee safety program, technology retrieval program, emergency communication capabilities, a relocation plan to sustain operations and maintain the flow of raw materials.
- Insurance program – Over the past two decades, starting with the Kobe, Japan earthquake on through to Hurricane Katrina – we usually underestimate the effects disasters can have on a business’s supply chain. After the Kobe earthquake one of the companies forced to scramble for alternative production locations and transportation was Toyota who could not produce 20,000 cars on schedule due to damage to important parts.
This is not to say that putting these plans into action is easy. We have a tendency to downplay the magnitude of these disasters due to the fact that many people have not experienced them. Thus, few have know-how to manage overseas supply chains. According to a study by Deloitte many companies who did not provide either or both continuity plans and insurance program lost more than 20% of market value immediately after the event. Furthermore, it took more than a y ear to recapture that portion of market.
Consulting with experts in these two fields will prepare them to prevent, control and lessen the consequences. However, many companies fail in these tasks by taking a narrow view of the issue. They simply put into place an IT business continuity plan and fail to immunize the balance of the company.
As far as the insurance program need to know the following:
- Does the insurer have the financial wherewithal to pay for the losses?
- Does the insurer demonstrate stability?
- Does the insurer have a history of paying claims promptly and fairly?
- Does your company have enough insurance coverage?
- Is the coverage in line with the actual replacement value of goods and materials?
While all this may seem and sound logical, it is not always common practice. Have a conversation with your insurance manager to see how the insurance is structured and will the present policy make the company whole again.
AN OUNCE OF PREVENTION IS WORTH…….