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Supply chain business continuity management: crisis lessons learned from the electronics industry

Essential lessons from the Japan disaster aftermath. By Patrick Brennan.

In the immediate aftermath of the Japan earthquake and tsunami, CFOs, supply chain and risk managers focused on assessing and mitigating impact on revenue and production. In the weeks since, many semiconductor and electronics companies have investigated how to make their crisis response more effective and streamlined.

In conversations since March 11, semiconductor and electronics companies identified the following as essential to effective supply chain crisis management:

Lesson one: Don’t apply the 80/20 rule to supply chain disaster preparedness

Having worked with many global manufacturers, it’s my 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 shipping $20,000 of product, something needs to change.

For a number of manufacturers, the catastrophe in Japan and its resulting aftermath shined a glaring spotlight on this flaw. Companies realized that a significant portion of revenue cannot be generated and crisis management cannot be completely effective without the other 80 percent of suppliers, which includes many single source, sole source and those with unique capabilities. Yet manufacturers chose to operate this way. Why?
The main reason heard over and over again is the limited internal resources available to direct at 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 business continuity and 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 plans, no alternate site, etc.

In the case of the situation in Japan, manufacturers learned the hard way that it is imperative that they 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.

Lesson two: Identify factory locations of critical suppliers before a crisis hits

After the Japan crisis hit, supply chain managers from an electronics company scrambled to determine which suppliers were potentially impacted. The CFO and customers wanted to know if production would be impacted. Their database contained multiple addresses for numerous suppliers with the resulting problem being that there was no way to tell which of the addresses, if any, indicated a factory location.

It turned out that for many smaller single/sole source suppliers, they had only invoicing addresses. There was no way to narrow down their supply chain to a smaller set of potentially affected suppliers. As a result, significantly more time and effort was required just to assess the crisis impact before actually being able to react. Once again, the lack of accurate information became the Achilles heel in reacting quickly to reduce the damage from the disaster event.

Lesson three: Visibility into supply chain subtiers remains a key challenge
All companies cited the challenge of gaining visibility into supply chain subtiers. Locating information about suppliers two or more tiers deep in their supply chain was slow and arduous. In addition, many subtier suppliers were uncertain themselves about when they would be back in business due to the day-to-day nature of their business environment, including when electricity would be restored, when the earthquake aftershocks would settle down and the status of the TEPCO nuclear power plant for suppliers in that area. Visibility into the subtiers beyond immediate suppliers remains a key crisis management challenge.

Summary
The key limitations in supply chain crisis management for many companies were first, focusing their risk program on top spend suppliers only, and second, not having an up-to-date list of supply chain factory locations, especially for their single/sole source suppliers not in the top spend. As a result, supply chain managers for these companies scrambled for days just to identify the potentially affected suppliers.

In contrast, some companies went beyond the typical approach. Before the crisis event, they had worked with all single/sole suppliers to reduce their risks and had a relatively up-to-date list of current factory locations for these suppliers. As a result, they were able to quickly hone in on a more limited (but still numerous) list of critical suppliers with factories near the crisis area. They focused much of their initial effort on those suppliers, allowing them to shift more quickly from damage assessment to triage, resulting in more options for safeguarding their supply. Yet even for these companies, visibility into the subtiers of their supply chain was a real challenge.

Author: Patrick Brennan is CEO of BCMexperts, a cloud-based supply chain risk management service. . Patrick is an expert in the supply chain risk management field, having consulted with global 500 firms for many years.

•Date: 29th April 2011 • Region:World •Type: Article •Topic: Operational risk

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