Supply chain managers must face the fact that their job descriptions now include disaster preparedness, which is an especially daunting task as global operations become more complex
One of the most publicized corporate failures in recent memory was the bankruptcy of General Motors in mid-2009, when the icon of American industry filed for Chapter 11 after years of mismanagement. But was mismanagement the root cause?
If truth be told, the bankruptcy of GM stems from a web of causality. Already struggling with crippling pension obligations and intransigent unions, the embattled automaker became prey to external forces. In 2008, Detroit’s long love affair with large pickups and SUVs (whose 15-20 per cent profit margins were far more attractive than regular car margins of three per cent) became a risk. As gas prices soared above US$4 a gallon, many cost-sensitive North American consumers simply stopped buying oversized vehicles. Anyone who still wanted an SUV, of course, found it more difficult to secure a loan. Prior to the financial crisis, it was common practice for consumers to use home equity loans to purchase vehicles and other big-ticket items. But as the value of real estate around the world collapsed, this source of financing dried up. Meanwhile, as job markets, stock markets and retirement funds fell in unison, the purchase of a new car, even a small one, became less and less feasible for most consumers. As a result of this perfect storm, GM’s sales plummeted. The rest, as they say, is history.
Although the effect of oil price on demand may have been something GM’s risk management department understood, the U.S. housing market was not likely on the top of their radar screen until the financial crisis reared its ugly head. Could anyone have foreseen how the Lehman Brothers collapse would impact the financial health of GM? This leads to a broader question: could traditional management tools have been adequate to fend off this perfect storm, with its multiple, unsuspected and simultaneous hazards?
In March 2011, Japan was hit by an earthquake. It was followed by a tsunami, which in turn created one of the worst nuclear disasters in recent history. Because it remains the historical location of countless component manufacturers, the disruption of global supply chains was considerable. And as fate would have it, companies like Honda that had facilities in Japan and Thailand were actually struck by another disaster barely five months later, when tropical storm Nock-ten swept a deluge up to Bangkok’s city limits, turning 65 of Thailand’s 77 provinces into flood disaster zones and causing an estimated US$47.5 billion in economic damage.
Thailand’s development plans had strategically promoted the design of clusters. As a consequence, a full third of global hard disk drive production had become concentrated in the cost-competitive Asian country. When disaster struck, the synergies they had shared became shared risk, as seven major industrial estates were submerged under three metres of water. Many of the 1,000-odd companies submerged in Thailand in 2011 had supply chain risk management programs in place. None of these anticipated the scale of the “worst-case scenario” that actually came to pass.
Although earthquakes, tsunamis and tropical storms are not necessarily correlated with one another, climate change implies that what insurance companies call a “force majeure” will become a routine occurrence. As a result, supply chain managers must face the fact that their job descriptions now include disaster preparedness, which is an especially daunting task as global operations become more complex. This article looks at how to address that issue.
RISK MANAGEMENT IN GLOBAL SUPPLY CHAINS
Globalization has created new opportunities and new threats. As sourcing from around the world made supply chains longer and more complex, the volatility inherent in production significantly increased. The number of supply chain members and the interactions among them has grown, exacerbating the lack of transparency in the operating environment. Company executives have increased profitability through ever-shorter times-to-market and product life-cycles, business processes improvement, just-in-sequence manufacturing, or vendor-managed inventory. But the technological progress, strategic partnerships and vertical integration that drove cost reductions also added to the supply chain’s vulnerability. Indeed, global supply chain (SC) networks are exposed to a number of potential threats, which themselves are constantly evolving.
SC networks are dynamic complex systems. They are not static. The structures evolve. Local disruptions typically propagate and lead to production shortages and contagion (Helbing et al. 2004). We can identify the most important nodes in the network by measuring connectivity and embeddedness. But with research on logistics clusters gaining influence, it is important to draw attention to the fact that clusters create both synergies and shared risk, a reality not adequately addressed by current discussion.
Reprint from Ivey Business Journal
[© Reprinted and used by permission of the Ivey Business School]