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The Automotive and Other Industry New Learning for Supply Chain Risk Management

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This coming Sunday will mark one year after the tragic disaster that impacted northern Japan and that provided such vivid images for all of us. There is little question that this incident, followed by the effects of the monsoon-driven floods that struck Thailand, have without doubt provided the wake-up call to the vulnerabilities of today’s global supply chains.

The Wall Street Journal’s Drivers Seat Blog penned a brief but rather insightful commentary related to the lessons being learned by major Japan based automotive manufacturers after the devastating earthquake and tsunami that impacted that country almost a year ago this week. We wanted to call attention to our Supply Chain Matters readers to this important evolving learning, but also add broader considerations for firms to  consider.

One year after the Japan disaster both Toyota and Nissan have taken initiatives to probe deeper into their respective supply chains to ascertain vulnerabilities.  Toyota itself has established a rather aggressive goal aimed at the ability to restore any of its manufacturing operations within Japan in just two weeks after the occurrence of a major disaster. The WSJ blog commentary goes on to note: “After the earthquake, Japan’s biggest car maker by volume asked about 500 suppliers to its domestic factories to disclose details of their supply chain. About half revealed sourcing network information, and Toyota found that some 300 production locations could be at risk.”

That statement alone is an important reflection of what occurred in the initial days after the disaster.  Supply Chain Matters has heard first-hand accounts from a number of senior supply chain executives indicating that while initial assessments may have given an indication of minimal or minor impact. It was the later assessments from lower tier suppliers that provided the real magnitude of potential disruption to supply.

The WSJ commentary also notes that Nissan’s COO recently asked its suppliers to take similar steps in disclosing details of the component supply network.  Supply Chain Matters readers of both our ongoing blog and newsletter commentaries will recall that in the case of Nissan, it was far more equipped to respond to the crisis and bounced back the earliest.  The latest financial performance results from all of the Japan based auto manufacturers now indicate how Nissan has been able to buffer any major sales decline and actually exhibit sales growth due of the flexibilities of its supply chain capabilities.

Over and above supplier assessments, there is a need to have singular organizational focus and accountability for risk identification and mitigation.  There are two fundamental components to risk namely, identification or mitigation as well as adequate response when major disruption occurs.  In our view, both must also fall under the same organizational umbrella.

Over on the Spend Matters blog, fellow blogger Jason Busch offers a recommendation that this accountability should reside in either finance, procurement or both.  Our view is that it should have even broader supply chain accountability, including a direct relationship to the company’s senior supply chain or operations executive. Notice that in the case of both Toyota and Nissan, the spokespersons are senior operational executives.

Like many other of today’s more demanding capabilities there is an all-important skills aspect to the identification and management of risk and firms need to assess the required skill levels to support these needed competencies.

Risk identification and mitigation requires advanced analytical and business intelligence capabilities as noted not only in the scope of Toyota’s effort, but in current benchmarks from companies such as Cisco, Procter & Gamble, FedEx and others.  There are needs to to quantify which components, regardless of individual cost, have the most risk to end-product revenue support needs.  Risks themselves need to be categorized as to frequency of occurrence. It also requires the existence of supplier early warning capabilities as well as the broadest visibility of what may be occurring throughout all layers of the supply chain at any given time.   Much of these capabilities require some investment in advanced technology, and we believe this will lead to broader perspectives for investments in a new class of supply chain control tower like applications.

Organizations cannot adequately address nor implement any technology investment without first gaining alignment in formulating a comprehensive organizational plan for addressing supply chain risk management. Such a plan has people, process, technology and change management components.

Technology providers in turn need to educate firms in understanding the building blocks or roadmaps for building adequate skills, organizational capabilities and safeguards in order to leverage these technologies.

One year after the tragic events impacting Japan, we as a supply chain community need to take a broader and more aware perspective towards existing risk to industry supply chains including the need to educate the highest levels of senior management as to the required building blocks and investments.

Has your organization gained a new awareness and sensitivity to supply chain risk?

Bob Ferrari

©2012 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters blog.  All rights reserved.

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