The Weakest Link

21/04/2015

More than four months after two natural disasters (and one unnatural disaster) rocked Japan, businesses are still experiencing massive slow-downs in their procurement of goods imported from the area. With everything from cars to computer chips facing big delays, U.S. investors with a toe (or deeper still, an ankle or leg) dipped in the iron and steel manufacturing industry, fear yesterday’s delays will be tomorrow’s profit loss. It has been this fear that has again illuminated the debate of the best way businesses can diversify their supply chain.

Why Diversify
In the last decade, numerous pandemics have walloped the logistics field, from China’s SARS outbreak, to tsunamis in Indonesia and Japan, the September 11 attacks in New York, and even the recent tornado that thumped across the Southeast United States. According to Bierce & Kenerson, P.C., a business and technology law firm specializing in outsourcing and commercial transactions, in events such as these, 40 percent of both workforce and end-users with ties to these disaster zones risk grinding to a standstill. Remaining flexible during a choke in supplier production is the best and sometimes only way to avoid the 40 percent halt. Preparing a supply chain to be flexible for any challenge the market bears is a multi-pronged strategy not only to subvert breaks in the chain, but also to weigh options between delivery speed and cost. Although disaster can cripple an unprepared company, it isn’t as common a problem as shortages at supplier facilities. Companies may need to tap into its chain diversity if their main supplier is overloaded, a seasonal bump in demand requires a quicker turnaround on delivery and an order is tardy, or if the company itself is running behind on orders. Multi-sourcing one’s supply chain is not a new idea, and despite the assurance that disasters will eventually strike, many companies remain undecided on the best way to divide and hedge their suppliers.

Motivation Method
An abundance of suppliers does not necessarily signify supply chain diversity. It is the role each of these suppliers play and the geographic proximity in which they play it that determines the effectiveness of such variance. Within each supply chain, a well diversified company will have multiple suppliers providing them the same or similar goods in areas disassociated from one another on the map, so as to ensure a regional disaster such as inclement weather doesn’t hit a company’s plan a, plan b and plan c all at once. Legacy suppliers often remain the primary source of goods even after diversification; otherwise it makes little sense for them to have been a legacy supplier in the first place. Realistically, legacy suppliers fill that role due to proximity. A metal fastener, for example, may cost a relatively similar the distance those fasteners travel and the freight costs that accompany them provide a much larger differential between the manufacturers. While some companies see multi-sourcing only as an emergency failsafe in case the legacy supplier runs dry, other companies see an opportunity to stoke the embers of competition between similar suppliers in order to barter the best deal. In both cases, diverging a supply chain effectively relies upon utilizing service centers in different electric grids and transportation systems. Syncing but separating telecommunications networks and virtualizing each server into a “cloud.” Obviously, a logistical restructuring costs money and risks negative disruption in the supplies already in place. But not, ultimately, what companies stand to lose if production stops running. Otherwise, diversification may cause duplicated efforts, extra costs, and non-cooperation that the price savings may not be able to justify.

Force Majeure
In addition to maintaining profit margins during disruptions in the supply chain, there is a precedent of legal responsibility set as well. Events like the ones that ripped through Japan in the spring are often considered outside the range of what a company can control and therefore safe from non-performance contract disputes. However, if a business could have reasonably mitigated or overcome the disruption by effectively implementing a continuity plan and failed to do so, that company may expose itself to legal action.

The Japanese earthquake, tsunami and nuclear disasters have ricocheted around the globe and have subsequently forced manufacturing plants to stall production; and from this stoppage, exposure and fracture of the weakest links in the supply chain. Slow-downs in these situations are to be expected, but for the companies reliant upon the uninterrupted manufacturing of facilities in this area, failing to plan for the worst is like waiting to take the elevator in a building going up in flames. There is hope among the rubble and promise for the future as long as the supplies are split.