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The Global View: Supply Chain Risk: Of Floods, Earthquakes, and False Hope

Posted By Everette Phillips, December 01, 2011 at 9:08 AM, in Category: Global Value Networks

I am lucky to live in a very beautiful part of the country. There is a very nice harbor and a marina, both of which are protected from the Pacific Ocean and the Santa Ana River by a levee built by the Army Corps of Engineers.

A combination of earthquakes and floods created this desirable place, as similar forces of nature have created many desirable places in the world.  Living here, I should be more prepared than I am for the next disaster. I should have stashed barrels of water and enough food for months, as some of my neighbors have done. I currently have some extra staples in the pantry, enough for a week of two for my large family, and I know I can access the water in our 50-gallon water heater. This is my risk contingency plan, and it will meet most of the needs I will have for most of the probable events.

In manufacturing, we also need to assess risks to our manufacturing facilities. We need to look at the probability of events like earthquakes, floods, and tornadoes, and develop a plan to cope with the most probable events. This is a fairly straightforward and easy process for a single-facility company. However, our modern supply chains—and practices such as contract manufacturing—make just about every company a multi-facility company.

There are constraints on how we deal with natural-disaster threats to our supply chain, because each possible solution impacts total costs and therefore impacts profits. If we use more than one supplier, there is usually a higher total cost associated with one over the other. To the extent we are paying more in total costs, we are actually paying for a type of insurance—a hedge against natural disaster or some other similar disruption. You can actually calculate the risk and value, and this should influence the volume you give to each supplier.

Companies facing natural disasters and other disruptions can adapt supply chains relatively quickly. One reason is the widespread use of contract manufacturing. In its simplest form, contract manufacturing is merely the management of global manufacturing capacity to achieve the greatest efficiency. We have tools and methods that allow us to quickly identify and adapt capacity to shifts in global manufacturing needs. Thus, the capacity from hundreds of CNC machines destroyed in the Thailand floods can be shifted to excess capacity on hundreds of CNC machines in China very quickly.

The ability of supply chains to adapt quickly is great for the consumer and the global economy, but it is small comfort for the areas—and the people—impacted by a natural disaster. When mud gets inside trucks, cars, CNC machines, and manufacturing equipment, you often cannot fully recover them. You may be able to recover more equipment from an earthquake, but by the time you are ready to start again, it may not make sense. As long as there is excess global capacity capable of making the same production, restarting production in the disaster zone may be a losing proposition. You would be betting on increased demand, so you need to be careful.

Many suppliers in parts of Japan hit by the earthquake and in parts of Thailand lost to the flooding will not be able to rebuild where they once were. Their customers have already found or are in the process of finding replacement capacity. And most will find it before these devastated suppliers will be in a position to compete again. Some highly specialized firms should be able to win back some business, but everyone will have to compete for and win back business that they once took for granted. Anyone rebuilding will have to start out with a fresh new analysis and business plan. Some will not rebuild.

Through robotics and automation and through supply chain management and contract manufacturing, I have participated in a variety of shifts of the kind I am describing. I am aware of the dichotomy of the situation. While the team involved in the ramp-up and development of replacement capacity enjoys the excitement of growth, the team involved in the ramp-down has to deal with the frustration caused by the detachment from what is left behind in addition to the feeling of loss of control.

But it is our human nature to avoid unpleasantness, especially regarding people we care about, and "capacity" can be a euphemism for "people." I think it is important to detach with dignity, to allow the other party to save face and make the best of a difficult situation. It is important to give recognition where recognition is due. It is also important to avoid giving false hope and promises that cannot be kept. False hope may distract the people left behind and cause them to make difficult choices with the limited resources that remain.

Everette Phillips is CEO and president of Global Manufacturing Network, a provider of contract manufacturing, sourcing, and logistics services for products and components with a focus on items with special engineering requirements.

Written by Everette Phillips

Everette's experience includes robotics, advanced manufacturing, supply chain management and international manufacturing. After a career path as a robotics engineer helping automate plants in North America, he became a manager of European Operations for Factory Automation & Robotics in Europe for SEIKO living an expat in Brussels then returning to the US as GM for Advanced Mfg Technologies in North America. Currently, as President of Global Mfg Network, he is involved in coordinating production of highly engineered parts, assemblies and products across a wide range of industries in manufacturing facilities located in Asia and North America and Europe. Everette is a regular speaker and panelist on topics related to manufacturing, international business and technologies such as robotics and advanced manufacturing. He has a BS Bioengineering from Cornell and an MBA from the UCLA Anderson School. Everette serves on the board of Cornell Engineering Alumni Association as a Regional VP and on the Advisory Board for Entrepreneurship@Cornell.

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