Figure 2. Earthquake Losses at a Sample of Electronics and Automotive Companies as of May
2011. Data collected from published company reports and online sources.
resources available for managing supply
chain risk in a comprehensive and consistent way across all vendor managers.
As a result, some top-spend suppliers are
reviewed in great depth while the disaster
preparedness of other critical suppliers has
not been reviewed in years. In the end, revenue remains at risk from critical single/
sole source suppliers with no factory risk
analysis, no disaster recovery plan testing,
no alternate site, etc.
Unfortunately, many manufacturers
learned the hard way from the Japan earthquake that it is imperative to maintain current information on the preparedness of all
of their critical suppliers. The challenge is
how to do this without tying up too much
vendor manager time.
liest disaster event since tracking began in
1965 with economic damage estimated at
$235 billion.
The severity of the earthquake and its
aftereffects, combined with rolling blackouts, delayed production recovery especially for Japanese manufacturers such as
semiconductor companies whose products
demand great precision and a consistent
electrical supply. Figure 1 (on the previous page) shows financial losses due to the
earthquake for a sample of semiconductor
companies.
Losses further along in the supply chain
were often larger as shown in Figure 2
(above). Since each supply chain tier adds
value, a shortage of raw material or an
inexpensive component early in the supply
chain can make it impossible to for companies later in the supply chain to build
their $30,000 car or computer server.
Lessons Learned
In the immediate aftermath of the Japan
earthquake, risk professionals, operations
and supply chain managers focused on
mitigating the impact on revenue and production. Now companies are questioning
their existing crisis management approach
and investigating how to make it more
streamlined and effective. Their experiences provide lessons which manufacturers must take to heart if they are to survive
and remain competitive when future crises
occur.
The events in Japan have shown us
that it can be weeks or months before a
manufacturer learns the full effect on their
supply chain. When a company discovers
too late that they are missing parts, they
have lost critical time in securing limited
inventory or sourcing alternatives that
their competitors may lock up before they
do. Slow response places significant rev-
enue at risk.
Lesson 1: Don’t Apply the 80/20
Rule to Supply Chain Disaster
Preparedness
Having worked with many global manufacturers, it’s our experience that the typical supply chain risk program only covers
the top 80 percent of spend which equates
to roughly 20 percent of suppliers.
The problem with this approach is
that many of the 80 percent of suppliers
overlooked are absolutely essential to a
company’s production sourcing and its
revenue. When the lack of availability of a
$1 part prevents a company from making
a $30,000 product, something needs to
change.
For a number of manufacturers, the
catastrophe in Japan shined a glaring spotlight on this flaw. Companies realized that
a significant portion of revenue cannot be
generated without the other 80 percent
of critical suppliers. That includes single
source and sole source suppliers and those
with unique capabilities, regardless of
spend. Yet manufacturers chose to operate
this way. Why?
The main reason is the limited internal
Lesson 2: Identify Supplier Factory
Locations before a Crisis Hits
After the great earthquake hit, supply
chain managers from a major manufacturer scrambled to determine which suppliers were potentially impacted. The CFO
asked for the revenue impact. Customers
needed to know fast if their production
would be impacted.
The electronics manufacturer searched
its database of supplier locations. Among
its problems was having multiple
addresses for suppliers but no way to tell
which of the addresses, if any, indicated a
factory location. For some smaller single
source suppliers, they found only invoicing addresses and were unaware of their
factory locations.
There was no way to narrow down
their supply chain to a smaller set of suppliers and be confident in capturing all
suppliers with factories in the crisis area.
As a result, significantly more time and
effort was required just to assess the crisis
impact before actually being able to react.
This was despite the fact that they had
collected business continuity plans from
top suppliers for years. Once again, the
lack of accurate supplier factory information became the Achilles heel in reacting
quickly to reduce the damage from the
disaster event.
In some cases, dual sourcing policies
gave a false sense of security when factories for both supplier sources were damaged in the disaster area. In fact, this is
common for large disaster events since
many countries have specific regions
