Managing the Variables in a Supply Chain Disaster
Managing the Variables in a…
There's been a lot of discussion on our site in recent weeks about planning for, and recovering from, natural disasters such as earthquakes, tsunamis, and floods. (See: How to Mitigate Supply Chain Disasters.) There are also compelling reasons to add geopolitical disruption to the list of events that can derail a global supply chain.
The volatility of global oil and gas prices has played a significant role in supply chain planning over the past year. (See: Death, Taxes & Fuel Surcharges.) Once again, turmoil in the Middle East could have an impact on the global oil supply. Iran's threat to stop the flow of oil through the Strait of Hormuz has supply chain experts thinking about the effect such a move would have on oil prices and, by extension, the transit systems manufacturers rely on to transport their goods.
Dr. Jeffrey Karrenbauer, president and founding director of supply chain consulting and analysis firm Insight Inc., estimates 20 to 30 percent of the world's oil supply passes through the Strait of Hormuz on a daily basis. If the strait were closed, oil prices could spike as high as $300 to $350 per barrel.
"The last thing that the world's fragile economy needs is a new confrontation in the Middle East," he told us in a phone interview. "Open conflict in the Strait of Hormuz would be a nightmare for supply chains throughout the world, raising the cost of raw materials, manufacturing, transportation, warehousing, inventory… essentially every component of a supply chain."
The electronics supply chain may be more fragile than most. The industry hasn't fully recovered from Japan's earthquake and Thailand's flooding; in fact, more than three quarters of readers responding to this week's EBN online poll say the industry is not prepared for another major disaster.
"The evidence is overwhelming that disruption, whether random acts of nature or premeditated actions by intelligent adversaries, can have severe economic consequences," says Karrenbauer. "Nevertheless, we still find that the majority of companies have spent little or no time planning for such contingencies. That is astounding, troubling, and, frankly, a significant management failure."
Companies can plan for catastrophes, Karrenbauer says. Although no one can pin down specific dates or times for such events, it's reasonable to assume companies built near fault lines will suffer from earthquakes; companies in warm climates will experience hurricanes; and unrest in the Middle East will threaten oil supplies. "All of these things have happened before. Look at how spooked the market was last year and how that drove up oil prices."
The first thing businesses can do, he says, is to get all departments together — IT, operations, sales, warehousing, administration, and management — and map out the company's entire supply network. This includes such things as the activity within their four walls; outside factors, such as freight services and transportation; raw materials supplies; taxes, levies, and tariffs; governmental requirements (such as RoHS); global manufacturing and warehouse locations (whether they are your warehouses or not); import and export regulations… basically everything that touches your supply chain. Too often, Karrenbaur says, companies don't pay attention to variables they can't directly control.
The next thing, Karrenbauer recommends, is running a variety of "what if" scenarios based on your specific supply network. There are tools that model these scenarios, including one that Insight offers. Knock out a supplier, a plant, a port or a warehouse and see what happens. Shut down a seaport or airport and look for alternatives.
"There are a million unknowns," Karrenbauer says, but these scenarios can help companies develop a Plan B. It's important to include both traditional logistics costs and international financial costs (such as duties and taxes) in these models, he adds. When a supply chain is optimized, companies can estimate their cost savings. When something goes wrong, costs won't be a surprise. "Something as simple as switching from air delivery to ocean freight can have a significant impact on the bottom line."
Karrenbauer and other supply chain experts say it's tough to convince companies to do this kind of modeling on a regular basis. Crises pass, new problems crop up, and business get refocused on the day-to-day. "Unfortunately, companies want to do this after a disaster happens," Karrenbauer says. "Clearly, that's the wrong time."
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"The electronics supply chain may be more fragile than most. The industry hasn't fully recovered from Japan's earthquake and Thailand's flooding"
Barbara, you are right. After the recent flood in Thailand, prices of SSD has shouted up and so far it hasn't come down. Recently I read that in production line they had almost recovered and it may take another few months to reflect in supply chain and market.
The EBN poll now shows nearly 80 percetn of respondants belive the supply chain is not prepared for another disaster
I totally agree with you on this, Bolaji. Significant new regulations on thriving industries are rarely greeted with cooperation and conciliation. In US history we only have to look at the Whiskey Rebellion, the Civil War, and Prohibition.
In Prohibition, we finally decided that the moral benefits were nowhere near clear enough to justify the social upheaval that resulted. If this is the case with conflict minerals, those closest to the situation will have to sort out.
This seems like a no win scenario.
FLYINGSCOT says:
I read your article with interest and I believe your very last sentence sums up the whole situation perfectly.
SunitaT says:
Dodd-Frank meant well, but winning this battle depends more on having stable, law-abiding governments in these contaminated mining zones.
@Bolaji, very informative article. I totally agree with you that we need law-abiding governments to win this battle. I think whole world needs come together and support the idea of building a stable and law-abiding government in such war-torn countries.
Dave, The group that benefits from this situation are the warlords. The Dodd-Frank reporting requirements is forcing out many of the local miners and squeezing supply. This will inevitably push prices up and, of course, the group that gets its products to market somehow will be the beneficiary and these are the illegal miners.
Bolaji, yup. It sure seems that way. I remember reading an article that had pleas from legitimate miners to the US government not to pass this legislation basically saying what you wrote about. Although well intentioned and they appreciated those intentions that for them it was going to cause more harm than good.
This situation seems to get more complicated as time goes on, and looks like there will be no winner. I understand the moral purposes of this law, but the government is fighting a no win situation. I tend to compare this battle with other lengthly and costly battles that still are unresolved. Gun control, if you ban guns out right the only people that will have guns are outlaws. A law won't stop them from having them. Drugs, look at the billions of dollars and decades of fighting this battle. Yet, there are still drug dealers everywhere.
Even if the SEC can sort out its situation and starts enforcing the Dodd-Frank provision, the war lords and corrupt governments will still sell their precious minerals. This might stop some U.S based companies from buying these minerals, but the world demand will not dry up and people will continue to get exploited in these war-torn countries.
The best defense is for a stable government willing to fight corruption and illegal activities.
I would believe the 80% to be a pretty realistic number. It doesn't seem like it would be that hard to set up some meeting with department heads and go over scenarios and contingency plans. Even though these plans may never be used, to ignore the fact would be foolish and potentially very costly.
Bolaji, if many electronics manufacturers have simply refused to buy components from these countries what other alternatives do they have ? Can these manufacturers source the materials from different (stable) countries or can they substitue these minerals with any other minerals which have the same property ?
This situation seems to get more complicated as time goes on, and looks like there will be no winner.
@Jay_Bond, there will be no winner but even worse it will pinch the end users more because the scarcity of these minerals will push the prices which means end users have to pay more when they purchase these products.
It's maddening that doing the right thing becomes such a nightmare. Maybe if companies got ahead of this issue and boycotted the abusive mines voluntarily, there would be less of an impact on the economies of the effected areas. It's possible that the political aspects of the Dodd-Frank Act did more harm than good. It raised a huge outcry over legislation that doesn't really restrict anything, it just requires disclosure. AS SOX has proven, disclosure doesn't mean anything–there hasn't been one prosecution of SOX violations since the Act was passed. It's up to the Justice Department or other agencies to overse compliance and honestly, the SEC is the last place I'd look for vigorous action.
BTW, does anyone remember how this particular legislation got attached to the bill? My impression is the rest of the Dodd-Frank Act has nothing to do with human rights violations.
dalexander says:
Barbara, The Congo and Tantalum come to mind. There was a time when tantalum capacitors went through the roof due to demand outstripping supply. Enter the technology force of Necessity and Invention. Organic Polymer Caps with low ESR, first introduced by Sanyo, later others followed. What do you think would happen if every time a conflict mineral was identified, team of technologist went to work on finding alternative materials? This sounds overly ideal but think of the mounting number of chemicals on ECHA's list that are hazardous to humans that also need alternate materials in order to allow a company to continue to ship it's products into REACH mandated territories. Maybe some kind of blending mechanism of REACH alternative chemical research with conflict materials resolution, could be formalized as a legislated entity to make every conflict mineral region aware that they either resolve their conflicts or their market for whatever resource they are exporting will soon be shrinking dramatically. Hit them below the money belt…so to speak.