Managing the Variables in a Supply Chain Disaster

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."