In the light of ever diminishing
profit margins, over-whelming demand for shortest possible time delivery and
minimum inventory holding, presence of a responsive and resilient supply chain
is a necessity. External factors like natural disasters, fire
accident at supplier end and government restrictions that are not under control
of the company also pose a significant risk to smooth functioning of the supply
chain. To address these issues let us have a look at some of the companies that
had to deal the issues that arise due to supply chain disruption.
In March 2011, Japan was hit by
earthquake and tsunami which caused huge loss of lives and also affected the
production facilities of major automotive companies namely Toyota, Nissan and
Honda. The effect was of such magnitude that it took Toyota over six months to
restore production to pre-calamity levels, resulted in a production loss
of 140,000 cars and 30% decrease in company profits.
Not all disruptions are man-made.
Closer home, labour strike at Maruti Suzuki India’s Manesar plant in June 2012
led to the shutdown of the plant for a month. The resulting effect was a daily
loss of INR 900 million and significant drop in sales and market value. This
led to long waiting period and cancellation of bookings of its top selling cars.
Supply chain disruption is an
unplanned event that adversely affects a firm’s normal operations. It can be a
sudden increase or decrease, in demand or supply that leads to imbalance
between the two.
A convenient solution for such an
unplanned situation can be, building Inventory. But holding excess inventory
can be a costly affair. Reasons behind it – the inventory carrying costs are
incurred continually and also the inventory is meant to be used only in a rare
events of disruption. So, the company may end up paying for resources that
remain untapped forever! There are also concerns for obsolescence of the
products. At the same time, holding excess inventory is reasonable in case of
commodity products that are associated with low holding cost and low risk of
obsolescence. For example, large amount emergency fuel reserves are maintained
by United States as Strategic Petroleum Reserves (SPR). It is one of the
largest emergency supplies in the world.
For products showcasing high
inventory carrying cost and risk of obsolescence, having limited but multiple
suppliers is a better approach. Controlled decentralization, hedges the risk
possessed by a centralized or pooled (single) supplier in case of untoward situations.
As in case of technology companies like Samsung Electronics which always aim to have at least two
suppliers, even if the second one provides only a fraction of the total
volume.This approach helps the company to lower risk of disruption in the
supply chain.
While disruptive environments are
hard to avoid, whether a company mitigates or fails in that situation depends
lot on the company. A classic example for the case is a major fire that broke
out in a plant in Philips electronics in March 2000. It was a major supplier of
semiconductors to Nokia and Ericsson and the fire destroyed chips meant for
millions of phones. Nokia was quick to respond to this by sourcing chips from
other plants of Philips and also procured from other suppliers. This multi-supplier
strategy along with timeliness, led to little effect of the situation on Nokia’s
demand supply capabilities. The other major customer of Philips, Ericsson was
confined to single supplier strategy. The single source of chips led to disruption
in mobile phone production by Ericsson. As a result, Ericsson ended up losing
significant market share to Nokia and a drop in net profits.
The contrasting outcomes to a single
event showcases that a responsive and resilient supply chain can alter the fortunes
of a company. Breakdowns at a point in the supply chain can have consequences,
which are not limited to that region rather, on a global scale.
Thus as a supply chain manager, one
should take an informed decision in designing the Supply Chain, by taking into
consideration all the factors and risks involved; past industry practices and
experiences; and whether it is sustainable for the company and the specific
product.
References:
1. WIPRO Consulting Services, “Supply Chain Vulnerability in Times of Disaster” http://www.wipro.com/documents/resource/ Supply_Chain_Vulnerability_in_Times_of_Disaster.pdf
2. Sanjeev Prashar; Harvinder Singh; AnshuKatiyar, “MarutiSuzuki India Limited: Marketing,” Ivey Publishing, Feb 6, 2013
3. Sunil Chopra and ManMohan S. Sodhi, “Managing Risk to Avoid Supply-Chain Breakdown.”
http://sloanreview.mit.edu/article/managing-risk-to-avoid-supplychain-breakdown/
4. William Schmidt Ananth Raman, “When Supply-Chain Disruptions Matter.” http://www.hbs.edu/faculty/Publication%20Files/13-006_cff75cd2-952d-493d-89e7-d7043385eb64.pdf
5. https://en.wikipedia.org/wiki/Strategic_Petroleum_Reserve_(United_States)
6. M. Sodhi and S. Lee, “An Analysis of Sources of Risk in the Consumer Electronics Industry,” Journal of the Operational Research Society 58, no. 11 (November 2007): 1430-1439.
The article is written by Aditya Pratap. He is PGP first year student at Indian Institute of Management Raipur.
