Japanese Quake Puts Spotlight on Supply Chain Risk
April 26, 2011 Alex Woodie
The huge earthquake and tsunami that struck off the coast of Japan last month caused massive devastation and loss of life that will scar the country for decades. While most of the physical damage was contained along Japan’s northeast shoreline, the disaster continues to reverberate within the world’s supply chains, as companies scramble to find new sources of automotive, electric, and computer parts. These events have highlighted the importance of assessing the risk that manufacturing and distribution companies are taking within their supply chains, and the tools that can help automate these assessments.
Nobody could predict that a 9.0-magnitude earthquake would hit off the coast of Japan on March 11, causing a 30-foot surge of water to careen miles inland, drowning about 25,000 people, and setting off three partial core meltdowns at a seaside nuclear power plant. Even for the Japanese, who are the world’s best prepared people when it comes to reacting to earthquakes, tsunamis, and nuclear fallout, the level of devastation was just unimaginable.
There are many lessons to be learned from the Japanese earthquake–not the least of which is whether it’s a good idea to put nuclear plants on earthquake faults and tsunami-susceptible shorelines. For companies around the world that rely on Japanese parts, the earthquake has been a rude wake up call, and a reminder that, in a globally integrated supply chain, risk can be difficult to spot, and it can spread quickly.
Mark Humphlett, director of ERP solution marketing for Infor, has been watching the events unfold. “It’s had a tremendous impact on some of the automotive and electronic parts coming out of Japan that feed assembly plants here in the states and elsewhere,” he tells IT Jungle. “A lot of those are single-source components that you can’t get anywhere else, so they’re scrambling to find alternate suppliers or alternate parts.”
The automotive supply chain in particular is being shaken up. According to a New York Times article, Toyota is scaling back its U.S. plants by 75 percent until June due to a parts shortage. Like Nissan and Honda, Toyota’s Japanese manufacturing plants are currently operating at about 50 percent capacity.
American auto manufacturers are also being impacted by the shortage, since many of them use Japanese-sourced parts that have since become scarce. Keeping just enough parts on hand to fulfill a limited amount of manufacturing–sometimes referred to as just-in-time (JIT) manufacturing–is a tactic many auto manufacturers have adopted to increase efficiency. The technique, which Toyota famously pioneered as its Kanban scheduling approach, adds more risk to supply chains that manufacturers need to be aware of.
“Over the last 10 to 20 years automotive plants have been switching to just-in-time methodology,” Humphlett says. “If you have any of those kind of supplier or supply disruptions, it has a tremendous impact on being able to keep those supply lines open, because there’s only so much buffer stock that outside suppliers will have.”
Other predictable disasters that companies should look for include the rising cost of energy, which threatens to cause big disruptions to supply chains around the world, and labor disruptions. Earlier in his career, when Humphlett worked in Europe with the Baan company, a question that was often brought up was: What do you do when France goes on strike? Invariably, it would, and the trucks would stop running. (The same thing happens every August, when half of Europeans go on holiday.)
Humphlett says events such as the Japanese earthquake and the rising cost of energy are driving interest in two Infor products in particular: Its SCM Network Design advanced planning tool and its new Sales and Operations Planning (S&OP) tool.
Network Design, which runs on a Windows workstation, helps companies sculpt a supply chain and locate distribution centers in a way that best achieves a goal, such as the highest possible efficiency, the highest profitability, or the greenest operation with the least CO2 emission. The product uses the what-if modeling approach to let planners see how different variables, such as the number and location of suppliers and the cost of transportation, will affect the company and its supply chain.
S&OP is a similar tool that can look at supply chain issues through a financial lens. The software, which runs on Windows servers, touches many different IT systems, and involves elements of demand planning, sales forecasting, production scheduling, supply and material planning, and inventory optimization. Infor refreshed the S&OP tool in February. In many cases, Network Design and S&OP will provide automation and replace manual, back-of-the-envelope calculations, or unofficial “sneakernets.”
After companies have reviewed their operations to identify the actual risks they are taking, they may choose to take actions. A reaction to supply disruptions caused by a disaster like the Japanese earthquake may be to ensure secondary and perhaps even tertiary supplies of critical components are set up and ready to go. Or perhaps a company increases its buffer stock. Either option entails greater costs, but that’s the price a company pays if it wants a rock-solid and dependable supply.
Large manufacturers may opt for slower but more affordable modes of transportation, such as rail or ship transport, if the cost of oil continues to rise. North American distributors that manage a far-flung network of distribution centers to reach every nook and cranny of the continent may choose to consolidate their operations into a smaller number of more centralized DCs if transportation fuel costs continue to eat into their profits.
In the end there is nothing anybody can do to stop an earthquake, a strike, or $200 oil, but a well-run company should never be surprised when they do occur. “It should never sneak up on you,” Humphlett says. “A lot of these risks are a lot more predictable than you might think. It is a natural disaster. But the impact of a natural disaster was supplier failure, or disruption in components. That’s a very predictable thing you can plan for.”