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Japan’s woes underscore need for supply chain risk management, experts say

Disaster provides stark reminder that supply chains can respond to almost any disruption if they are agile and flexible.

Beneath the personal and economic havoc that the recent natural disasters in Japan have brought are important lessons about planning for supply chain disruptions and the need for supply chain risk management, according to experts.

They urge manufacturers to do their utmost to make sure they can respond to any kind of interruption – whether or not it’s on the same scale as a devastating earthquake.

“There’s an opportunity for companies to be more comprehensive about the way they address risk assessment, and have more flexible supply networks, more diversified supply networks,” said Simon Ellis, practice director for supply chain strategies at IDC Manufacturing Insights, based in Framingham, Mass.

For one, it means identifying other suppliers so if a primary supplier goes down, others can pick up the slack. 

“I’m not suggesting [companies] have excess capacity, but [they] do need to have contingent capacity,” Ellis said.

A range of software applications are available to help companies plan for and mitigate disruptions, but they shouldn’t rely on IT alone to protect them, he said.

“I think mitigating supply risk is less about software, less about IT, than it is about creating a risk management culture,” Ellis said. “I don’t think it’s rocket science. It’s about coming up with the best Plan B you can make.”

‘You can plan for the aftermath’

Companies should do a thorough risk analysis, which will largely dictate their inventory levels, according to Mark Humphlett, director of ERP product marketing at Atlanta-based Infor, a maker of supply chain management software. Contingency plans need to be “part of a company’s DNA,” he said.

Humphlett reiterated the need for identifying additional suppliers ahead of time, especially if those vendors need to be preapproved or certified in some way by the manufacturer. It’s too late to wait until a crisis hits, he said.

The risk-management strategy should also include closely evaluating alternative parts that can be used in case the usual ones become unavailable.

Nobody could have sufficiently planned for what happened in Japan, Humphlett said. But manufacturers can plan for mitigating what comes after natural or man-made events that cause the kinds of breaks the disaster opened in Japanese supply chains, he said.

“You can’t plan for these kinds of interruptions,” Humphlett said. “But you can plan for the aftermath.”

The IT component of supply chain risk management

Besides Infor, a number of vendors make software that companies can use to mitigate supply chain risk.

For example, SAP’s Supply Chain Event Management software gives visibility into the supply chain by allowing companies to track products and receive alerts when there are interruptions to the plan. The application feeds into SAP’s Transportation Management software, which lets companies re-route shipments to avoid further complications, according to Richard Howells, SAP’s head of solution marketing for supply chain management.

A third part of the approach, Howells said, is Supply Chain Network Collaboration which gives manufacturers greater clarity and collaboration with their suppliers.

“You can see what is being delayed, what is going to be delayed, and what is in danger of being delayed,” Howells said.

The economic risks are underscored by the fact that companies reportedly lost $222 billion worldwide in 2010  to supply chain interruptions, three times more than the year before. That’s because more and more companies are using suppliers and vendors in other parts of the world, according to Howells.

“Supply chains are much more global now,” he said.

Supply chain forecasting vs. responsiveness

Many companies pay too much attention to demand forecasting and not enough to making their supply chains agile and flexible, according to Ellis.

“I just think that responsiveness is something that’s been undervalued,” he said, adding that he recently wrote about how automobile manufacturers were slow to respond to parts shortages caused by the events in Japan.

Today, forecasting is increasingly difficult because markets are very dynamic and unpredictable, Ellis said.

It can also put companies in a bind.

“If this is the forecast that my supply chain is designed to meet,” he said, “I have no degree of freedom outside of that forecast. When that forecast proves to be inaccurate, as it typically does, then I’ve got a real problem.”

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