Disruptions in Supply Chain Management – Learning it the Hard Way

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.