The following commentary can be viewed and commented upon on the Supply Chain Expert Community web site.

As many of the supply chain management community are acutely aware, the after-effects of the earthquake in Japan will have far reaching impacts on multiple industry and global value-chains.  A lot of commentary can be found in the blogosphere and in traditional media, and we at Supply Chain Matters have also added our own perspectives which can be reviewed here and here.

Before continuing with this commentary, we should again emphasize our empathy for the people and victims within Japan who have and continue to endure the effects of this calamity.  Our thoughts and our prayers should continue to be focused on their recovery.

Unfortunately, tragedies bring implications and that is on what this commentary will reflect.

At this particular time in this evolving crisis, the one important unmistakable conclusion is that just like the 2008 global financial crisis, the Japan event will ultimately seed a number of significant watershed changes for industry supply chain strategies and capabilities going forward. The open question is how significant and how deep.

In this commentary, we reflect on a few of the more significant implications.  Jason Busch of Spend Matters called attention to a Paul Martyn, commentary published on Forbes.com that noted an estimate that it would be 9 to 12 months before production can return to pre-disaster levels. That seems to be a reasonable general estimate and there certainly could be some outlier exceptions, particularly in electronics and automotive sectors.  In his commentary, Martyn predicts three major shifts as a result of this crisis:

1.       A lessoning of the rigidity of zero inventory policy that many companies have been following these past few years.

2.       The entry of new players takes advantage of the crisis to seize new revenue opportunities.

3.       Bullish upside for U.S. and perhaps North American based manufacturers that stand to gain in the short-term as alternative suppliers.

Regarding point three, Jason Busch opines that then again, U.S. manufacturers may once again be unable to respond to the new business opportunities because of a lack of required capabilities in key people skills such as machining, welding, design and other specialized manufacturing.  Needs for updated capital equipment are also expressed. Steffora  Mutschler, contributing editor on EDN notes in a commentary a specific prediction from Dale Ford, senior vice-president of market intelligence at IHS iSuppli where Ford asserts his belief that for the semiconductor industry as a whole, the earthquake will provide the biggest impact in the history of the industry. None of the previous natural disasters have been as broad in multiple supply chain impacts.

We would add our prediction that this crisis, when the dust finally settles, will also challenge the very foundations of procurement and outsourcing strategies which will cause product development, strategic sourcing and supply chain management teams to reassess their policies and processes in product and component sourcing.

The crisis will be another critical reminder to the importance of having solid supplier relationships, including how priorities during a crisis will always lean toward established and loyal customer and supplier relationships. While previous strategies were primarily motivated by lower cost considerations, Supply Chain Matters believes that the current realities of business risk and changing end-markets will challenge previous management motivations. The era of the CFO dictating supply chain strategy is about to be shaken to its core.

For the longest time, supply chains have been constantly reacting to all forms of crises, either internally or externally driven.  The voice of the supply chain has been hampered perhaps by an inability to converse with the boardroom and articulate desired business outcomes with required capabilities in planning, agility, procurement policy and customer fulfillment. Too often and too frequently, supply and value-chain strategy directed at needs for specific business driven outcomes have been rather viewed in a ‘cost center’ or ‘shared service’ mentality…  “We will not have inventory!  We do not have the time or budget resources to address specific risk or needs for process agility! Planning on spreadsheets can get the job done just as effectively!”

Traditional industry analysts harp on being more demand-driven or customer focused, and can well cite numbers of multi-national companies who had the foresight and budget to invest.  The crisis involving the after effects of the Japan disaster is a supply-driven crisis, with many implications to all sizes of manufacturers and service providers relative to customer demand, industry competiveness and perhaps the role and fabric of the supply chain.

How have the events in Japan changed thinking in your company, or has it neglected to change any thinking?

Weigh in and let’s get a conversation started.

Also, take the time to participate in our Supply Chain Matters interactive polling question of the month and ascertain how other teams may be impacted by Japan.

Bob Ferrari

At the beginning of March, the U.S. Food and Drug Administration (FDA) announced that a form of salmonella had been found in hydrolyzed vegetable protein (HVP) which was being supplied by Basic Food Flavors of Las Vegas. No reported illnesses or deaths have been traced to the subject HVP thus far, but the FDA and individual food companies need to insure end-products that include this recalled HVP incorporate production processes that involve a certain process of cooking to kill the bacteria.  Otherwise, according to the FDA, the end-products should be recalled.

An initial New York Times article reported that thousands of processed foods, from soups to hot dogs, contain the HVP that is suspected of being contaminated with salmonella.  Our initial Supply Chain Matters commentary on this ongoing incident noted how potentially widespread the effects of this recall may be across food related supply chains. We also again stressed the critical importance that supply chain traceability and risk mitigation have become required process capabilities, and how important technology helps in supporting such capabilities.

The first major food manufacturer to quickly respond to this incident was Procter and Gamble, that manufactures and distributes Pringles brand potato chips. P&G voluntarily recalled two specific flavors of Pringles which were affected by the HVP recall.

As I pen this posting, there are currently 159 different products listed on the FDA web site as under voluntary recall, and the list is growing every day.  The categories are broad, ranging from bullion and gravy mixes, to sauces, soups, ready-to-eat and processed food products.  Thus far, product brands include well-known names, such as Dean’s, Durkee, French’s, Herbox, McCormack, Pringles and others.  Private label brands are not immune, including CVS, Kroeger, Publix and Trader Joe’s.  Institutional brands sold to restaurants and food service customers are also included.  In other words, when the dust does settle, this will be a far-reaching disruption involving multitudes of different product supply-chains, because the source ingredient is included in so many different products.

Consumer product companies now have to deal with even more negative perceptions by consumers on the overall safety of the food supply chain.  Just queerying any search engine on the topic of HVP recall will bring together a collage of visual images of food brands that are part of this recall.  This of course is not the way companies want their brands represented, and to make matters even more interesting, information is now being disseminated regarding what HVP really is.  A posting on the Good for You blog on MedBroadcast notes that HVP is the disguised version of monosodium glutamate (MSG), to which many people are extremely sensitive.  The composition of MSG in HVP is such that the existence of MSG does not have to be noted on the product label.

As with previous incidents, this large-scale recall involving HVP will continue to unfold in the coming weeks and months. Brands and supply chains will again be tested.  Supplies will be purged and brands will have to reinvigorated with higher profile marketing.  If there is one key takeaway, there should be no excuse for any consumer products oriented company not to have an active supply chain risk awareness and mitigation plan in place.

Bob Ferrari

The following posting can also be viewed and commented upon on the Kinaxis Supply Chain Expert Community web site.

Readers of the Supply Chain Matters blog often know how often we have been highlighting incidents of supply chain risk related to product recalls originating from contamination or bogus materials.  The incidents have been far-reaching, ranging from the ongoing massive recall incident involving multiple models of Toyota vehicles to numerous incidents of contaminated or bogus products entering various industry supply chains.  One common aspect of many of these incidents is when certain products originating from specific suppliers are the source of the contamination and the effects rapidly cascade to other multiple product-related supply chains.  Past incidents include peanut products, pistachios, drug compounds and more recently cracked pepper that coated certain salami products.

The most recent real-time incident involves the suspected contamination of hydrolyzed vegetable protein (HVP), which is an ingredient incorporated in many food products.  On March 4th, the New York Times reported that thousands of processed foods, from soups to hot dogs, contain this flavoring ingredient that is suspected of being contaminated with salmonella.  The specific supplier named was Basic Food Flavors of Las Vegas Nevada, and the original discovery was made by a customer upstream in the food processing supply chain. The U.S. Food and Drug Administration (FDA) inspected the Basic Foods plant in February and uncovered salmonella in the company’s processing equipment, which led the company to voluntarily recall all of its HVP product produced since September 17, 2009, over five months worth of production.

The article notes that most affected products are safe because cooking, either before or after sale, eliminates the risk.  But that in no way eliminates the risk if your particular product does not completely meet that cooked criteria, or erring more on the side of caution prevails in terms of risk to the consumer.  As even more real-time evidence to this situation, yesterday Procter and Gamble voluntarily recalled two specific flavors of its very popular Pringles potato chip product because they contained this same suspect HVP ingredient. I have no doubt that there may be other recall announcements coming.

Once again, the important take-away reinforced by these ongoing incidents is the critical importance that both supply chain traceability and risk mitigation have become as required process capabilities, and how important technology helps in supporting such capabilities.  An overdependence of regulatory agencies to discover and track the actual sourcing of contamination often implies that the supply chain has already been impacted by an incident.  This mandates the need to be able to quickly and efficiently trace where certain products were manufactured, and to which customers or retail outlets they were distributed.  It also implies the ability to be able to quantify the overall risk involved and the ability to quickly quantify, assess and implement risk mitigation plans.  Having a supply chain planning system that can perform what-if analysis and quickly re-plan for alternative ingredients is rather fundamental, as well.

Our community often looks to P&G as the benchmark in world class supply chain capability.  It should therefore be no surprise that within days of the original announcement, P&G was able to trace what specific end-products were or were not at risk, what lot numbers were involved, and was able to transmit important information to consumers on a dedicated web site. 

Successful risk mitigation occurs when proper planning, process, and information technology enablement are in place.  Too often, the negative effects come when they are not in place.

 Bob Ferrari

After many of the sobering images of the devastating impacts as a result of the massive earthquake that occurred in Haiti, there are now occurrences of significant earthquakes occurring in both Chile and Taiwan.   Supposedly, scientists indicate that all three of these massive events are not related in terms of seismology.  I do not portend to be any where close to a scientist, but my practical sense seems to tell me that when the earth shakes so dramatically in one part of the globe, it must have some impact or push on other parts of the globe. In any case, these occurrences have to be causing many citizens in the world to be on edge. That includes businesses with critical supply chains that lie within the impacted areas.

The magnitude 8.8 quake that struck southern Chile on February 27, 2010 has led to a series of frequent and very powerful aftershocks.  The government of Chile continues to respond to the human casualty toll along with crumbled roads, fallen bridges and disrupted communications.  The latest concerns revolve around a potential outbreak of disease brought on by the effects of the devastation.  Commerce within the impacted areas has no doubt been disrupted and the long-term effects of the quake are yet to be determined.  From a global supply chain perspective, a particular concern relates to the mining of copper and lithium supplies which come from the northern regions of the country.  These areas do not seem to be directly impacted and have resumed operations but continuing aftershock activity surely remains a concern for suppliers and customers.

On Thursday, a major earthquake and several aftershocks struck Taiwan, the heart of many high tech, consumer electronics and apparel supply chains. The magnitude 6.4 quake struck near the city of Pingtung in the southern region. This quake was rather shallow (3.1 mile) in depth, and disrupted roadways, bridges and transportation, and damaged four undersea Internet cables in six different places. This damage to the SWM-3 (Southeast Asia-Middle East-Western Europe 3) cable temporarily disrupted all Internet service between Taiwan and China’s Guangdong Province, the major coastal manufacturing region of China. Service has since been rerouted through other cables and networks. There were also service disruptions on the CUCN (China, US Cable Network), APCN (Asia Pacific Cable Network), and FLAG (Fiber Optic Link Around the Globe) North Asia Loop between Taiwan and Hong Kong. In terms of production impacts, there were reports of a major fire in a textile factory in Tainin, and a recent report notes that the quake could significantly impact the production of LCD panels with two of the largest panel manufacturing plants closing their lines until damage can be assessed and repaired.

No doubt we may be discovering more effects of these series of major earthquake disasters across the globe, in human, infrastructure and supply chain disruption perspectives.  The sensitivity and concern levels related earthquake disaster have escalated, regardless of scientist opinion, and supply chain professionals need to be at the ready.

 Bob Ferrari

Note: The following posting can also be viewed and commented upon within the Kinaxis Supply Chain Expert community web site.

Amidst all of the attention being made to Toyota’s ongoing product recall and sales suspension crisis related to sudden unattended acceleration of certain model vehicles, another interesting question has been posed.  In the weekend edition of The Wall Street Journal, reporter Daisuke Wakabayashi penned an article (subscription may be required) noted that lean manufacturing can sometimes backfire.

The premise is that the utilization of common designed parts (i.e. the accelerator assembly) across multiple product models can backfire when major quality control issues arise. Toyota utilized one supplier, CTS Corp., to supply the subject accelerator pedal assemblies.  The argument is that cross-model component sourcing risks are magnified as companies expand globally.  The other premise noted in the article is that growing technological complexity… makes it harder for manufacturers to diagnose problems in the early stages, before the issue becomes more widespread.

My view is to reject this broad argument.

Lean manufacturing methods and common platform designs are a long proven method for insuring cost, as well as quality efficiency.  In fact it was Toyota that led the way in pioneering these efforts.  Common part designs can enhance product quality and cost by allowing product designers to source from approved suppliers with consistent quality and on-time performance capabilities. Lean production methods, when performed correctly, can also spot any quality malfunctions at the source of production, insuring that corrective actions are taken before a build-up of non-conforming parts.

The incident with Toyota, in my view, appears to be more related to a broader feedback loop, one that involves the actual operating use of vehicles and reporting of incidents.  We can all speculate as to when Toyota first became aware of the SUA problem in its vehicles, and what actions were taken to ascertain the scope of such problems.  No doubt, Toyota and certain governmental agencies will be pursuing such investigations.  This has more to do with product management and design than lean manufacturing.

I believe the headline for Toyota is not about the backfire in lean manufacturing, but rather an awareness of both design and supply risk management. This should not be the purview of manufacturing and supply chain, but rather product management and design.

What’s your view?  Do you view this ongoing recall as being exacerbated by lean, or by other shortfalls?

Bob Ferrari

Disclosure: Kinaxis is one of other sponsors of the Supply Chain Matters blog, and as such provides financial consideration for having its product logo and product information linked to this blog.