Risks Persist One Year After Japan Tsunami

Just a few weeks ago, we marked the one-year anniversary of the earthquake and tsunami that devastated Japan. While this is certainly not an event to celebrate, I think it does warrant a little reflection.

No one can predict with pinpoint accuracy when natural disasters such as earthquakes and volcanic eruptions will occur, and even if we could there is no stopping Mother Nature. But that does not mean that members of the electronics supply chain should resign themselves to being at the mercy of these or any other natural or man-made occurrences that can disrupt the supply chain.

In today's global business environment, risk management can no longer be perceived as an optional or expendable part of a corporate strategy. Awareness and proactive planning can dramatically decrease the negative effects of a supply chain disaster. While I am encouraged by the increasing attention paid to risk management in the supply chain, I am also stunned at times with how shortsighted some companies can be, particularly as they explore opportunities in emerging markets.

At Avnet Inc. (NYSE: AVT), we work closely with customers as they look to expand their businesses into markets outside the US, and urge them to consider the vast range of potential risks that each new market may introduce into their supply chains.

We often see that events such as the Japan earthquake serve as an abrupt and shocking reminder of just how tenuous the bonds of the global supply chain can be. Yet, with time, the impact of this jolt fades, and often so does that urgency around supporting an aggressive risk management program.

I understand, to a degree, the temptation during times of relative stability to let your guard down and cut back on risk management resources, but doing so is ill advised. Not only are you leaving your company vulnerable, but you are essentially negating all the time and resources that have already been allocated into your risk management program. A "set it and forget it" approach doesn't work. Risk management programs must be managed in accordance with the ever-changing dynamics of the global supply chain.

Since understanding risks and impacts on the supply chain are essential to managing them, the Supply Chain Council has recently introduced a new tool to help companies better manage their risk by first measuring it. The council's "Value at Risk" (VAR) metric takes the probability of an event and multiplies it by the expected impact of the event (i.e. if this happens, what does it mean for my organization?).

VAR provides a more methodical and financially based means of evaluating each risk factor, thereby enabling companies to define where resources should be focused. The reality is, not all risks are created equally and each company's strengths and vulnerabilities will determine which risks are significant enough to warrant investment in proactive mitigation.

Communication and transparency of information among trading partners are also vital to an effective risk management program. Avnet's new Control Tower offering is designed to provide transparency into the multiple echelons of the supply chain to give customers the ability to not just respond to risks, but proactively mitigate them. Control Tower is essentially a repository of information gathered by Avnet so that in the event of a supply chain disruption, customers can quickly assess suppliers' ability to maintain the flow of product. Examples of the kind of information that can be found through Control Tower are demand forecasts, channel inventory, SKU level sell-out, WIP inventory, shipping data, and purchase orders.

Please feel free to contact me if you would like to discuss ways in which you can better protect your global supply chain.