In its journey of maturity, procurement has gone through dramatic changes, evolving from a tactical function to a digitalized, strategic process.
Disaster ‘There’ Doesn’t Mean Business is Safe ‘Here’
Risky business is more than a movie title … When disaster strikes, whether natural like the recent Japanese earthquakes, or man-made like the Bangladesh apparel factory collapse, the immediate concern is the lives of those affected.
Once we have taken care of humanitarian relief, it’s only then that we consider the business aspects. As the old saying goes, the “show must go on” and the person who needs a Toyota to get to work to support his family is not so sympathetic to the automaker’s financial plight. It becomes incumbent on businesses to ensure continuity for its customers, employees, shareholders and, yes, profits!
Supply chain risk is an integral part of business continuity planning, which is not restricted only to IT systems and outsourced providers but the entire end-to-end supply chain.
Companies need to know not only the health of their suppliers, which many do well with supplier risk management systems. But that must extend beyond their primary suppliers to their second-tier, third-tier, and more. What if your third-tier supplier in China is outsourcing to a mom & pop operation in a garage in Shenzhen? Where’s your visibility? Your control? Wouldn’t it be nice to have a navigable map of all the linked suppliers along with their business and location? When a disaster hits, working out alternate supplies could be a competitive advantage. GEP, for example, has a database of 35 million suppliers across the globe, continuously enriched by third-party sources.
What you don’t know can hurt you. Clearly, the more you know the better—and quicker—you’ll be able to react. A strong software program can tip you off, no matter where you are or what device you’re on. That instant intel can make all the difference. The earthquake of April 14 struck in Kumamoto prefecture on the southern island of Kyushu. If you have a supplier there you can quickly adjust output to, for example, a second supplier (if you have more than one—and you should) in Sapporo on the northern island of Hokkaido (or in another country).
One way to gain that knowledge is by adding risk assessment and forecasting into your procurement platform. It will enable you to identify and assess risk so you can establish a plan to avoid, or at least mitigate risk.
For Toyota, not having parts for its factories would not only reduce profits but also compromise its generally lofty position in the market place. Shame to the Name is a very real danger. An astute program would have alerted the automaker just as the earthquake hit, allowing them to trigger previously designed alternate supply plans, maybe even gaining a competitive edge on other Japanese carmakers who weren’t prepared. In fairness, Toyota did make some changes after the devastating magnitude 9.0 earthquake and tsunami of 2011. Just not enough, as the company chose to stick with its lean, just-in-time inventory system. The April quakes (magnitudes 6.5 and 7.3) caused a two-week shutdown of 26 plants.
Look, the earthquakes that hurt Toyota (and Honda, Nissan and many others) occurred more than 6,000 miles from the United States. But General Motors announced that, beginning on April 25, it would shut down four North American assembly facilities for two weeks. Why? Because of the scarcity of parts coming from Japan. No work, no cars coming out of Spring Hill, Tenn., Lordstown, Ohio, Fairfax, Kan., and Oshawa, Ontario, Canada.
But is this risk only limited to suppliers and the goods they supply? Remember, risk is present throughout the entire supply chain and in any industry. What about, say, a cereal company? Should it be concerned about coffee production? Yes. Increased coffee production could lead to increased consumption, which would create demand for more sugar, reducing the supply (and probably increasing the cost) of the sugar cereal makers—and their customers—need.
Far-fetched? Not really. The Japanese earthquake was quite far and its reach was long. And perhaps that reach still is extending. So, as the Boy Scouts say, “Be Prepared!”
Today’s supply chain needs to be flexible and agile, capable of responding quickly and positively to sudden changes — and that cannot be achieved t
Strategic sourcing has been the go-to approach for transforming procurement from a tactical to a strategic function, capable of delivering the kind