Supply Chain response to natural disasters

When developing any strategy or approach one should consider the associated risks.

Risk analyses considers the probability of a risk occurring and the impact that the risk would have should it occur. From this analysis viable and cost effective sourcing actions necessary to mitigate the risk can be developed.

Where the continuity of the supply chain is at risk the response, as in how the automotive industry in Japan was affected by the 2011 Japanese Tsunami, is often to increase inventory in the form of safety stocks or to develop a second or alternate source of supply. Both of these are valid strategies but can carry heavy penalties. The supply chain decision to hold inventory can affect cash flow and to delay investment as cash is tied up in stocks, there are also storage costs and interest rates to consider.

Development of a second source of supply can be costly especially the more complex and bespoke a product, component or service is. There may be a high cost in setting up a new supplier and fixed costs associated with product development or capital expenditure, these costs would need to be absorbed into the price of the product. If forecast demand drops significantly then these fixed costs may have a considerable impact on pricing. Where high capital costs are involved the utilisation of the new capability should be considered as, if under-utilised, piece part costs could rise considerably.

There are alternative mitigations to the risk of supply chain discontinuity. Where readily available standard products or components are at risk it may be relatively easy to switch supplier. Where bespoke goods or services are at risk it may be possible to review the design or specification of these and adopt a more readily available standard offering.

Talking point

• Can you give an example of how this thinking might influence your sourcing decisions?