After the 2011 earthquake and tsunami in Fukushima, Japan, many multinationals learned painful lessons about the hidden weaknesses in their supply chains — weaknesses that resulted in loss of revenue and market cap. While most companies could quickly assess the impacts that Fukushima had on their direct suppliers, they were blindsided by the impacts on 2nd– and 3rd-tier suppliers in the affected region.
Almost 9 years later, it seems the lessons of Fukushima must be learned anew as many companies worldwide scramble to identify which of their “invisible” lower-tier suppliers — those with whom they don’t directly deal — are based in the affected regions of China. “Many companies are probably also regretting their reliance on a single company for items they directly purchase”, writes this interesting Harvard Business Review (March 5, 2020) article. Supply-chain managers know the risks of single sourcing, but they do it anyway in order to secure their supply or meet a cost target. Often, they have limited options to choose from, and increasingly those options are only in China.
Risk management principles (which are summarized in Table 11.3 of your Heizer/Render/Munson text) should be applied, at a minimum, to tiers 1 and 2 in company supply chains. Beyond tier 2, the risks should at least be understood. In some cases, it will not be possible to find multiple sources for certain parts or materials. For example, a supplier may possess unique intellectual property; sometimes volumes aren’t sufficient to justify two sources; or multiple sources are simply not available. In these cases, companies need to supplement their traditional sourcing practices with new sources of data and new approaches to understand and mitigate the risks they take on.
When companies have advance knowledge of where the disruption will come from and which products will be impacted, they have lead time to execute avoidance and mitigation strategies immediately — like
shaping demand by offering discounts on substitutes, buying up inventory, booking capacity at alternate sites, or controlling inventory allocations.
This epidemic again teaches that a robust supplier-monitoring system is a basic requirement for today’s supply chain managers.