Another Wake-up Call, Japan's Earthquake and your Supply Chain

The events in Japan have been truly devastating. The images of whole towns being wiped out sends a chill down your spine. The earthquakes and tsunami that hit Japan have not only wreaked havoc on the Japanese people and their economy, but it has far-reaching implications for much of the world, If you are a distributor of automotive parts, electronics, or lithium ion batteries, you may already have lost some sleep in the last few days. As The New York Times reported on March 20, "The Japan quake will prompt companies to re-evaluate risk in their supply chains." But even if you are in an industry segment without obvious ties to factories in Japan, you need to be thinking harder about managing risk in your supply chain.

This is not our first wake-up call. Earlier this year the world was struck by an earthquake in New Zealand and major winter storms in the U.S. We also should remember last year's Gulf oil spill and the earthquake in Chile. All of these disasters affected the global supply chain. Globalization of supply chains only escalates the risk of disruptions in the supply chain. How many distributors today have at least some globalization in their supply chain? Most.

What are some of the supply chain risk categories that distributors need to consider?

• Natural disasters
• Supplier issues - strikes, accidents, political instability, etc.
• Global shortages
• Product contamination
• Transportation disruption
• Transportation capacity
• Suppliers going out of business

You cannot afford to have contingencies for everything that might happen, but the challenge is to balance the probability of supply chain disruption against the cost of protection. If you expect tight supply of your products in the future, increasing inventory levels might be the answer, but at what cost? Let's take a look at the key factors that need to be evaluated.

Factor 1 Cost of carrying inventory, additional bank financing

Factor 2 Cost of additional warehousing, insurance

Factor 3 Cost of developing a second source for some products

A long term multi-year approach is a good plan. If you are in a tight supply situation temporarily, inventory may be the answer. But if this happens every few years, have you looked for and evaluated alternate sources? Have you explored sources in other countries or regions, not just for today but for the future?

Here is a supply chain model that is typical of most distribution businesses. Listed below are some steps that you can take to quickly improve the supply chain risk management readiness of your business:

Model your supply chain to identify potential risks - Most distributors know who their suppliers are and where they are located. But do you know who supplies your suppliers? Modeling your supply chain should include not just suppliers and customers; it should also consider the raw materials and components that are critical elements of the products your suppliers provide to you. Your model should also identify the key transportation companies that transport most of your incoming and outbound shipping. If there is an issue at a port or a natural disaster that affects the normal method of transportation, it is a good idea to have an alternative transportation plan in place.

Develop contingency plans - Have back up suppliers and alternate plans for transportation. There may be a cost associated with identifying and developing alternate sources of supply, but the benefit in a time of crisis or short supply can more than make up for that initial expense. In addition, alternate suppliers give your business some additional leverage in controlling prices when things return to normal.

Document your processes - What would happen if your office and warehouse were in an area that was suddenly inaccessible to your employees for several days? Do you have a plan for an alternate site that includes access to business systems, and other essential data?

Collect and analyze information - Your suppliers and customers can provide early warning signs of a change that will affect your ability to receive and ship product. One of our current clients with both customers and suppliers in Japan has been able to adjust schedules and re-schedule their own shipments based on communications from their Japanese partners. Do you have a process in place to receive internet articles and alerts based on key words - i.e. your suppliers' names, locations, etc.? Today it is possible to collect information on a real time basis that can be used to anticipate and react to issues that might affect suppliers or transportation companies. It is too late for companies to adjust inventories based on the Japanese disaster; however you should consider making adjustments when information indicates that it might be the prudent thing to do.