Abstract

This case illustrates how firms should formulate and implement global operations and supply chain strategies for risk management to alleviate disruptions to their operations and supply chains from natural disasters or safety and security problems. The fact that only 10% of businesses have contingency plans in place to cope with operations and supply chain disruptions despite the likelihood of disasters means disaster planning/risk management should be an essential part of their supply chain strategy.

Case

Volcanic eruptions, a global flu pandemic, the flooding of New Orleans and other locales, terrorist attacks, riots in the Middle East, and the Great Recession are all examples of events that have sent firms reeling. Likewise, the devastating earthquake and tsunami that struck Japan in 2011 left a trail of debris, death, and destruction in its wake. Despite the likelihood of disasters such as these, experts estimate that fewer than 10% of businesses have contingency plans in place to cope with disruptions in their major operations and supply chain.

"It is times like this that separate those companies that have their act together from those that don't," said Jim Lawton, the president and general manager of D&B Supply Management Solutions (Short Hills, NJ), a firm that provides business information, consulting, and management solutions worldwide. He went on to say at the time of the disaster, "What [firms do] in the first 24 hours [after the tsunami] is going to determine whether they land in a decent place or crash and burn."

Even companies that didn't have key suppliers in Japan were affected. Producers far up supply chains often still relied on basic components produced in the country. Japan supplies 25% of the world's silicon wafers, for example. What's more, many firms that had outsourced work to Japanese firms competed for a limited amount of manufacturing capacity in places such as Singapore, Vietnam, and Indonesia. Said Lawton at the time, "They really are all interconnected."

Consider as well the experiences of Hurricane Harvey's devastation of the Houston metro area in 2017. With flooding and wind damage, estimates are that nearly 700,000 automobiles were destroyed, logistics to and from the area ports were seriously impacted, and fuel shipments and the operations of oil refineries and storage facilities stopped for an extended period. With such a large percentage of America's refineries and fuel transshipment in the Houston area, Hurricane Harvey led to months of higher gas prices nationally.

So, given these complexities, where does an organization start to develop a risk management plan for its supply chain? First, it is critical that the company get a detailed picture of its supply chain, not just first-tier suppliers but also the more distant suppliers of its suppliers. For example, although a firm may think that you are protected, what if one of its key suppliers relies too heavily on one source for its raw materials? Should the firm consider hiring additional suppliers to prevent a situation in which it would be without critical raw materials?

Second, firms must plan for disruptions and take the appropriate lessons to heart. Purchasing goods and services from a single supplier can hold down a company's procurement costs because the firm can often get volume discounts for its purchases. Nevertheless, the strategy can also be risky. Wherever possible, it's a good idea to funnel some work regularly to an alternative vendor. If Supplier A encounters a disruption, it's much easier for a company to go to Supplier B for emergency materials if it has a partnering history with that supplier.

Third, successful firms make risk management an ongoing part of supply chain strategy. It should not be a one-time-only undertaking; risk management strategies must be continually updated and reconsidered in light of changes in the global economy and the organization's operations.

Yet, because it so difficult to prepare for every type of emergency, most experts agree that successful risk management comes down to supply chain agility. As Lawton noted, it helps to diversify the supplier base wherever possible. These organizations should think about shifting some production out of Asia or Latin America to be closer to home. They should seek to generate an organization that can react quickly to whatever happens, including knowing precisely which individuals are responsible for executing an emergency-response plan and equipping them in advance with the tools necessary to do the job.

Discussion Questions

1. Think of Heinz's (H. J. Heinz Company, Pittsburgh, PA) production of consumer goods and food products. How might you develop a risk management and disaster response for the company's supply chain?