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The Supply Chain After the Disaster

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.

14 comments on “The Supply Chain After the Disaster

  1. prabhakar_deosthali
    June 24, 2013

    I agree that there is a need to have a Plan_B  for handling the supply chain issues in the situations of natural or man-made disasters.

    The companies need to plan for and switch to disaster operating mode whenever the situation calls for.

    The escalated cost of salvaging the damaged parts, machines or returned goods has to be taken into account in this model of operation and like insurance premiums some % of it can be loaded as operating costs even in the normal mode of operation so that the burden of managing the disaster situation is equally distributed  on the normal supply chain function.

     

  2. elctrnx_lyf
    June 24, 2013

    It is definitely not an easy task for the companies to estimate the loss incurred due to loss of equipment and more than this having a Plan B is certainly a very tedious job. However you prepare a natural disaster can cause big loss to any manufacturer.

  3. Tom Murphy
    June 24, 2013

    For me, the first vital ingredient of Plan B is flexibility because by the time you get around to useing it, Plan B may be Plan C.

  4. SP
    June 25, 2013

    DIsaster management is a tricky subject. One can do some risk mitigation but its difficult to predict the scale of disaster and of course the timing. And if you do too much of planning in terms of components back up who will pay the extra cost.

  5. FLYINGSCOT
    June 25, 2013

    I find it very worrying that high tech “damaged” parts are finding their way back into the supply chain.  How can we make sure our cars and medical electronics are safe in that they have not been infected by salvaged components.

  6. Tom Murphy
    June 25, 2013

    FlyingScot: I think that's a valid concern. I would hope that “salvaged” parts are marked as such, and sold as such to the manufacturers, who are ultimately responsible to the consumer.

  7. prabhakar_deosthali
    June 26, 2013

    A new breed of companies having expertise in salvaging whatever possible from the damaged products, retesting and certifying them for reuse could be the future trend as the frequency of natural disasters increases worldwide. 

    These companies could be supported by insurance companies who have to pay heavy compensation to the insured.

  8. Tom Murphy
    June 26, 2013

    Prabhakar:  Those companies already exist! And they are self-supporting!  But I hae to ask you: would you buy a smartphone at full price if you knew some of the parts were salvaged from a tsunami or wildfire?  If not, what sort of discount would you expect?

  9. prabhakar_deosthali
    June 27, 2013

    Tom,

    As long as the product is coming from the original company I would not ask such questions as to whether any of the parts have come from old products . It is assumed that if the company has used a salvaged part then the part is as good as a new one .

    If the company itself declares that a product has used some of the salvaged parts and as a result a limited warranty is offered then of course the product has to be sold at some discounted price.

  10. hash.era
    June 27, 2013

    @Tom: Good point. I wouldn't even if its being offered for a lower price since the quality of the phone is not there in damaged parts.       

  11. Adeniji Kayode
    June 30, 2013

    @Prabhakar,

    I agree with you on that, most consumers don't care about the source that makes their components,as long as its working fine.

  12. Adeniji Kayode
    June 30, 2013

    @prabhakar,

    Do you think companies need to declear where they are getting their compoments from.

  13. prabhakar_deosthali
    July 1, 2013

    In my opinion no customer will ask for such details as long as the company certifies that the “product” is new and  provides warranty.

    Only the technology geeks may be interested in dissecting a product to find out what has been used inside.

     

  14. SunitaT
    August 1, 2013

    Keeping a good relationship with a diversity of suppliers is critical to your supply chain. Use suppliers who use different ports of dispatch, as it allows the capability to control costs and service levels in business-as-usual times, and great flexibility in times of disaster recovery. Diversify transportation; have alternate routes in case of transportation disturbance.

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