Supply chain lessons from Japan

By Gerard Cachon, The Wharton School at the University of Pennsylvania. Source: Matching Supply with Demand.

Gérard Cachon

The devastating earthquake and tsunami in Japan have again raised the issue of supply chain robustness to disruption risk, and in particular, are they too fragile? (3/15/2011) asserts that  ”Strategies that look rational for individual manufacturing companies… can create big macro-level vulnerabilities…”

The reality is that it is too costly to source every component from multiple locations throughout the world just to hedge natural disaster risks. But that doesn’t mean that companies should turn their back to the problem. The best companies follow a few intuitive steps to make their supply chains more robust. I’ll offer two.

First, map your supply chain. If you know your Tier 1, Tier 2 and Tier 3 suppliers, then you won’t have to spend one week figuring out whether you will run out of a part. Most companies know their Tier 1 supply chain, but do they know the other tiers? Do they keep track of changes to the supply chain? This information is crucial because the company that is first to work the phone to find alternative  supplies is most likely to be able to secure those supplies.  This information also gives you information that you can use to make downstream adjustments to your production. For example, should you eliminate an overtime shift or not? Should you redirect scarce parts from one plant to another? Those are difficult decisions to make and are made much more complicated if you don’t even know if you have a problem – why shut down a plant for a potential part shortage that may not materialize?

Second, before disaster strikes, map out vulnerabilities. Some components can be sourced in many locations. Some components have several months of buffer inventory. You don’t need to worry about those. But if the amount of buffer inventory is limited and it is sourced in a few locations, especially a few locations that happen to be close to each other, then you need to consider finding alternative sources or alternative parts. Maybe the conclusion is that the company needs to bear the risk – there are no effective alternatives. But maybe the conclusion is that a substitution to a less risky part is actually feasible.  Finding this substitute is less costly before the disaster. There have been reports of companies that are scrambling to qualify additional suppliers, but that could have been done before disaster struck.

Finally, one risk that will hit many companies, even if they don’t have a shortage of parts, is the risk of exchange rate fluctuations – the Yen has just hit a post WWII high against the US dollar.



6 Responses to Supply chain lessons from Japan

  1. It’s good to model alternatives for sourcing and distribution to anticipate seismic or political disruptions, etc.; but these models should include the cost of implementing and maintaining all these redundant resources — which could be prohibitive. Many are bemoaning the single sourcing and supply chain bottlenecks of the auto manufacturers (with suppliers in Japan); but the jury is still out on this. It’s quite likely the benefits of fewer sources closer in proximity outweigh the more bullet-proof model with redundant geographically distributed sources and assembly operations.

  2. scm says:

    It’s going to be great if there is a unified supply chain risk management methodology. So every member in supply chain can communicate and execute plan more effectively.

  3. How important of Tier 1, Tier 2 and Tier 3 suppliers is the first thing that you should know if you need to be number one in business owner because they’re the one of your factor to success in Logistics and supply chain

  4. Yes, the risk of the exchange rate between the Yen and the Dollar will definitely prove to be risky for some companies. The US needs to do something about this.

  5. Will Kelly says:

    With all of the unforeseeable disasters that could strike businesses, this is incredibly important advice. There are many people who would read this an think that it “couldn’t happen to them,” but I’m sure that is just what the Japanese businesses thought before the tsunamis.

  6. Mitko Popov says:

    The problem with the Yen is a true problem but soon won’t be. The Yen will be devalued big time and exports will be good again as well as the chain network improvement. According to Kyle Bass hedge fund manager of Hayman Capital Japan will face a debt crisis soon and will have to devalue the Yen as their last option.

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