When disaster planning for the supply chain, people rarely talk about what happens when parts and devices are damaged but not ruined. However, in the aftermath of the Japanese earthquake and tsunami, the Thailand floods, and the hurricanes and tornadoes in the US, it's high time for this conversation to start happening in a big way.
Reverse logistics and repair are crucial parts of disaster recovery efforts. Fortune 500 electronics manufacturers will have to rebuild production equipment. Individual consumers will want their under-warranty cars, laptops, and phone replaced. Third-party vendors will be salvaging and reselling scrapped parts.
Let's take Hurricane Sandy, just because it's still fresh in many people's minds. In February, the National Insurance Crime Bureau raised its estimate for the number of vehicles damaged by the storm to 250,500. That number is still based on preliminary figures and could change as more insurance claims are processed. Many of those cars have been cleaned up and may be back on the market under the “good but previously damaged” label. Many others have turned up without such a label.
Hop over to Asia, and the numbers are more chilling. About $360 billion in economic losses were incurred when the earthquake and tsunami hit in 2011. Japan experienced record trade deficits of about $78 billion in 2012, according to the Brookings Institute.
During a trip to Thailand last summer, I spoke with high-tech executives who described having to take apart manufacturing equipment and let parts dry out. They had to make sure every piece met quality standards before it could be reused. An economist told me that the flooding caused a loss in output of about 2.5 percent of the country's GDP (or approximately $9 billion). But what was the total cost of the equipment lost, damaged, repaired, and replaced? I don't know, and I guess I would have to go through many companies' balance sheets for several quarters to get even a rough estimate.
After the storm
The point is supply chain planning for natural disasters doesn't end with a few high-level suggestions. Yes, Ryder Systems is right to say that inventory needs to be strategically repositioned, alternative transportation modes must be preselected, and network analysis must be done to see where vulnerabilities are across the supply chain. However, companies also need a Plan B for so many things that are frequently considered only after a disaster strikes.
- What's the protocol for scrapping parts?
- At what point is a part or device deemed repair-worthy or unusable?
- What parts definitely need to be on the shelves just in case other parts have been damaged?
- Who holds that just-in-case inventory, and what's the estimated cost?
- What's the recycling strategy for parts that have been dumped by companies or consumers?
- Who absorbs the cost for retesting and requalifying parts?
All these things fall under risk mitigation, but they also dovetail with brand protection and corporate responsibility. However you categorize them, they won't come cheap.