Supply Chain Matters Guest Posting: More on the Supply Chain Impacts from the Thailand Floods

The following Supply Chain Matters guest posting has been provided by Mark Wells, a principal at End-to-End Analytics.

Online Wall Street Journal Photo

“Supply Chain Matters” readers are painfully aware of yet another serious supply chain disruption, this time from tragically severe flooding in Thailand.  According to recent reports featured on the Wall Street Journal Online site (paid subscription or metered view may be required) Ford, Toyota and Michelin have cut back operations.  Ford says that lost production could reach 30,000 vehicles.  Forty percent of hard drives for personal computers ship from Thailand  and Western Digital makes sixty percent of its disk drives in that country.  More disruptions to value networks are surfacing as I write as a result of this catastrophe.

While the human cost of these disasters is devastating and defies valuation, the cost to businesses whose value networks include operations or suppliers in Thailand will not only be measurable, it will also be significant.

At a recent IBF Conference in San Francisco John Brown, Director, Risk Management, Supply Chain Development at The Coca-Cola Company (TCCC) recently made the point that while you cannot simulate the infinite list of events that might disrupt your supply chain, you can simulate most of the effects.  For example, if you have a significant portion of your value network in a country or region, you need to anticipate a loss of supply and have a contingency plan on what to do when that happens.  Then, as Kevin Harrington, Vice President, Global Business Operations, Customer Value Chain Management, Cisco Systems, has emphasized in multiple presentations, it is important to train your organization on exactly what procedures to follow in the event of a disruptive effect.

Firms who are leaders in planning to be resilient in the face of disruptions evaluate at least single level effects, create contingency plans for each, and then train key personnel on how they will operate under those contingency plans.  It’s difficult to take the time do training when there is no visible disruption, but that experience will become invaluable when trouble strikes unexpectedly.

Natural disasters are not the only source of disruption, but they are significant and difficult to anticipate.  When a natural disaster, civil disruption, or similar event resulting in a serious downgrade to your value network transpires, you need the capability to quickly simulate the how flow of materiel, information and cash can be facilitated with portion of the value network seriously degraded.  Beyond simply having the technical ability to simulate, you need the talent and insight to ensure that the inputs and assumptions upon which you base the model are valid and that the conclusions you draw from the results are reasonable and feasible.

Economic risks can compound the effects of these natural disasters in the form of rising and or uncertain commodity prices as well as fluctuations in currency exchange rates.  Skilled data scientists can build econometric models that enable you to predictively analyze commodity prices and foreign exchange rates, not only to arbitrage risk today, but also so that you will know immediately what strategic procurement actions to take in the case of a disruption.  Dow Chemical, for example, has created an advanced analytics group that focuses on (among other things) predicting prices of key manufacturing inputs.

It was Ben Franklin who said, “By failing to prepare, you are preparing to fail.”    Preparation for a disruption to your value network through planning and practice will always seem like overkill before the disruption.  During the disruption, however, previous preparation will demonstrate the wisdom of your investment in planning and practice and help to maintain the value of your enterprise.

Other reading on the topic include recent posts in this blog, “The Effect of Supply Chain Disruptions on Long-term Shareholder Value, Profitability, and Share Price Volatility,” by Vinod Singhal from Georgia Tech and Kevin Hendricks of The University of Western Ontario (June 2005) and The Resilient Enterprise:  Overcoming Vulnerability for Competitive Advantage  by Yossi Sheffi, MIT Press 2005.

Arnold Mark Wells is currently a principal at End-to-End Analytics.  He blogs weekly at Friday Forethought.

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1. Ben Benjabutr says:

   October 31, 2011 at 9:55 pm

   I believe there is one thing in common about flood situation in South East Asia (and in Thailand). Local authorities just don’t communicate effectively about actual situation.

   Implication for supply chain management professionals is that quality of information and source of information play the important role to risk mitigation. Another thing is that it’s time to consider supply chain insurance to protect against economic loss from natural disaster.