El Niño Tests Supply Chain Resilience & Risk Management

Recently, severe tropical storms have hit coastlines and headlines with dismaying regularity. From severe tropical Storm Etau in Japan to Hurricane Joaquin in South Carolina, businesses are reminded of the importance of good supply chain planning, from resiliency to risk management, in the face of global weather-related disasters.

Caption Factory site clusters mapped to regions of Japan based on Resilinc global supplier repository intelligence.

Caption Factory site clusters mapped to regions of Japan based on Resilinc global supplier repository intelligence.

Caption Factory site clusters mapped to regions of Japan based on Resilinc global supplier repository intelligence.

“Experts are saying this will be a severe El Niño years can break records and be as bad as 1997 and 1998,” Bindiya Vakil, CEO of Resilinc, a supply chain monitoring vendor told EBN in an interview. Resilinc recently published an impact analysis brief  entitled “El Niño: A Test of CPO Leadership and Your Supply Chain Resiliency Culture,” which provides a basic primer on El Niño from a supply chain perspective and what to expect for the 2015-2016 season

Vakil continued:

Supply chain professionals will push out investment in risk management because we don't know when it will happen. In this case, there is a finite time frame provided and warning has been out there now for several months. What are we waiting for?

Every country has it's own potential weather related issues. In Malaysia, companies are worried about lack of water and power and inflation and how that affects labor availability and macoeconomics. Japan is concerned about the risk of floods. Meanwhile, heavy rains that cause landslides and impact access to important mining locations can negatively impact Peru, which produces plating chemicals used in the electronics industry. Planning for these potential disasters is critical.

Clearly, storms, drought and other weather patterns impact business. In fact, a closed factor can cost an electronics manufacturer millions of dollars a week, or even result in a business closure. Worse, a widespread weather disaster puts OEMs in competition with each other for limited product inventory. If Chief Procurement Officers (CPOs) have not prioritized supply chain risk management capabilities for their organization, the coming months will prove challenging for their organizations, Vakil predicted. For those who prepare, global supply chain disruption events are viewed not as threats but as opportunities to gain competitive advantage.

“OEMs take location risk very seriously and made investments to deal with many types of events,” said Vakil. “The whole area of supply chain risk is growing. Recovery times aren't acceptable so how are you managing resiliency and recovery times? These are the tough conversations OEM customers need to ask and the conversations are happening as we speak.” 

It's important to remember that weather events, whether droughts or floods, can have a broad and deep impact on a vast array of supply chains. “As we look at agricultural products, our default is food and inflation goes up,” said Vakil. “We forget that agriculture and its derivatives, such as sugar cane and palm oil, are used in pharmaceutical and high tech industries.”

Further, these weather events have the potential to impact indirect infrastructure. For example, as the push for hydroelectric power continues, drought becomes a major concern. “Countries with huge dependency on water are affected by drought and business can suffer,” said Vakil.  “Malaysia comes to mind with huge hub of high tech manufacturers. Many of these sites need continuous, uninterrupted power and in some cases water supply.”

Proactive planning for disaster is a must. However, the planning must be strategic. “We have to remember that we cannot increase inventory across the board,” said Vakil. “We have to make sure suppliers have through various risk scenarios.”

Smart OEMs look at various scenarios based on product, country, or revenue-impact-based approaches, Vakil said. “None are the perfectly right approach,” she added. “There's a combination of things to consider.”

Start by considering the products that have the greatest potential revenue impact. “You want to make sure you have inventory to cover near-term demand, and make sure of where suppliers are located that factories are protected,” Vakil said. “You always have to narrow it down to the most critical.” 

Consider a typical scenario: top revenue products contain components and material sourced from more than 50 suppliers. Among those suppliers, perhaps 40% have a factory in a potential flood area and another 10% have factories in areas plagued with drought. “It's critical to understand recovery times and discern whether you have the existing inventory to buy yourself some response time in case of a bad situation,” said Vakil. “And you have to discuss with the supplier to make sure that they are working to react and respond quickly.”

Further, OEMs need to research alternative sources of supply, and have contingency strategies in place to allow quick and effective movement to alternate suppliers or factories in the case of downtime.

Too often, organizations consider stockpiling inventory to the best strategy—at the expense of other values. “Inventory is just a band aid, which is always concerning,” said Vakil. “We have gone to a lot of effort to make the supply chain efficient and there are operational benefits for being lean. We don't want to jeopardize the main objectives of being lean.”

— Hailey Lynne McKeefry, Editor in Chief, EBN Circle me on Google+ Follow me on Twitter Visit my LinkedIn page Friend me on Facebook

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