By Denise Harrison, Executive Vice President and COO
The location and severity of any specific natural disaster are difficult to predict – so you need to prepare for a disruption in your supply chain, given that a natural disaster could impact your business at some point in time. Even Toyota, known for its superior management practices, was caught flat footed after the earthquake/tsunami, when its supply of a pearl luster pigment, Xirallic, was interrupted for several months. Was its supplier a small company? No, it was the large chemical behemoth, Merck that supplied this product from its facility which was located in the region that was affected by the disaster.
Toyota and other car manufacturers scrambled to meet their production schedules without this important pigment. What did they do?
- Some car manufacturers immediately stopped taking orders for cars requested in the colors that used Xirallic.
- Some manufacturers changed to an alternative supplier offering some colors with a similar pearl luster quality
How should you prepare?
First you need to know where your risks are:
- Identify your sole source suppliers (only one supplier is capable of producing this product/service)
- Identify your single source suppliers (you have a single source, but other suppliers are available)
- Answer the question: How fast does a disaster interrupt your production
Is it immediate?
- The timeframe of the impact is important to how much focus you give to mitigating a specific risk
Sole source – mitigating risk
- Does your supplier have multiple production sites?
For example, Merck is building another production site in Germany, ensuring supply in the event that a natural disaster impacts one region of the world and not another
- Are there substitutes for the product/service? In a pinch what could you do?
- Do you build inventory on the “immediate risk” items so that your production is not shut down while you explore other options?
- Do you have a communication plan for notifying your customers concerning the impact of a disaster when such an event happens? The faster you notify your customers of the impact and the expected timing, the faster they will be able to decide their course of action. Merck was slow to notify its buyers concerning what impact the disaster had and the possible timing for resolution. While this is not always easy to predict, a happy, but unrealistic forecast is not what your customers want – they want to understand, to the best of your ability, what the timing looks like so that they can take steps to mitigate the risk for their customer base.
Single source – mitigating risk
- You can follow all of the steps in the sole source example, but you have some additional options as well.
- Have alternative suppliers pre-qualified, but make sure that you are qualifying suppliers that have a different risk profile. Identifying an alternative supplier one mile down the road from your current supplier does not necessarily lower the risk by identifying and qualifying an alternative supplier. This would help you if the production issue was a plant fire, but not help you if the whole area were flooded by a hurricane and production was impacted throughout the region.
Develop Plans to Mitigate the Risk
Once you have developed a list of your sole source and single source suppliers, and assessed the risk associated with each supply disruption, you need to develop a plan to mitigate the risk for the suppliers that would have a high and quick impact on your business if a disaster occurred. You will also need to develop the communication plan so that your customers are kept in the loop and are not blind-sided by the lack of availability of a product. One company I worked with identified one item that was sole source and had immediate impact on their production. They decided to keep a large inventory of this product on hand; while it was a minor cost item, without it, the product could not be produced. When the supplier had a strike, this company had enough supply of this item on hand to continue production. This foresight allowed them to gain market share while their competitors were shut down.
What about Service Industries – Are there any important supply issues? How about labor?
Yes, remember the Icelandic volcano that cut off travel to and from Europe? Many firms, including service firms found that the volcano disrupted their supply of human capital. As a service firm, it is important to understand where your risks are around human capital and ensure that you have back-up plans in place when travel logistics are interrupted for long periods of time.
Did Toyota learn its lesson quickly enough to prevent the next production glitch? No, the recent flooding in Thailand has put another monkey wrench in its production schedule. What about your company? An earthquake/tsunami in Japan or a volcano in Iceland or floods in Thailand –no matter what your threat looks like, you should understand the impact that the threat has on your business and develop plans to mitigate your risk. If you have questions about how to incorporate threat risk assessment into your strategic planning process please contact me at: firstname.lastname@example.org
For more on this subject please read: Turning Threats into Opportunities.
Denise Harrison is Executive Vice President and COO of the Center for Simplified Strategic Planning, Inc. She can be reached at email@example.com.
© Copyright 2011 by Center for Simplified Strategic Planning, Inc., Ann Arbor, MI — Reprint permission granted with full attribution.