Supplement 11 – Page 4 – The OM Blog by Heizer, Render, & Munson

Good OM Reading: Superstorm Sandy and Supply Chains, One Year Later

A month or 2 into dreaded hurricane season, and the US has so far dodged the bullet. Still, with 7 hurricanes expected to hit, what can be learned from Superstorm Sandy is a topic for discussion among supply chain managers. Though Sandy hit shore last year as “only” a tropical storm, it was one the most devastating weather events since Hurricane Katrina, in part because many supply chains were caught off guard.

In the aftermath of Sandy, the Securities and Exchange Commission led a just-released study of mid-Atlantic companies to understand how this event affected them and how they recovered. Here is a quick summary of the results:

Consider all the possibilities of widespread disruption: Business continuity plans should take into account all possible sources for electricity, fuel, water and telecommunications in an effected area. Consideration should be given to multiple, redundant services and the proximity of vendors to the potential disaster area. Companies also should consider solutions that allow employees to work remotely.
Consider alternative locations: Companies should consider diverse alternative locations with adequate resources to stay up and running and how they will get enough employees there.
Examine critical vendor relationships: Companies should take a look at vendors that provide critical services or products, from fuel to banking and finance, and line up Plan B vendors (including pre-arranged contracts) if they should be knocked off-line.
Telecommunications and technology: Contract with multiple carriers rather than relying on a single provider.
Communications plans: In addition to staying in close touch with customers and trading partners, firms should consider establishing relationships with multiple broker-dealers to facilitate alternative market entry points.
Take into account time-sensitive regulatory requirements: A crisis can happen at any time, potentially interrupting month-end data for regulatory computations and financial reporting. This is a good reason to dump paper solutions.
Review and test the plan: Business continuity plans, including vendor and customer lists and other critical data, should be updated continually and tested at least annually.

The recommendations in this short SEC report may have been drafted with financial firms in mind, but the advice applies to all businesses and their supply chains.

OM in the News: Supply Chains and Thailand–A Year After the Flood

Disruptions in global chains have moved from an academic subject to a daily topic in the past two years. The Wall Street Journal (Oct.6-7, 2012) headline “After Floods, Businesses Still Wary of Thailand” provides a good classroom topic when you are covering Supplement 11. A year after massive floods in Thailand that disrupted the global supply chain for cars and electronics, most factories are at work again, but not always like before.

Some foreign companies—having learned hard lessons about concentrating too much of their production in one country—are shifting to other parts of Southeast Asia. Thailand’s worst floods in 50 years, coming just seven months after Japan’s earthquake and tsunami, exposed the danger of relying on narrow, concentrated supply chains. So foreign companies are hedging their bets by building facilities and finding suppliers in other regions so they can quickly resume operations if disaster hits.

Western Digital, one of Thailand’s largest foreign employers, moved some manufacturing of hard-disk drive components from Thailand to Malaysia. The company, based in Calif., also asked some suppliers to take similar steps, hoping to avoid a components shortage like last year. Western Digital now employs 25,000 people in Thailand, compared with 37,000 before the floods.

Japan’s Omron Corp. shifted some production of relays—electromagnetic switches for automobiles and motorcycles—to Japan and China. Nidec Corp., also based in Japan, moved part of its production of hard-disk-drive motors to China and the Philippines. This production “will not be coming back to Thailand,” said its president. Yet he added that Thailand has “skill and technology that overcomes other issues.” Nidec, which suffered damage to eight of its Thai factories last year, has cut production of disk drive motors in the country to protect against another disaster.

Discussion questions:

1. How can firms avoid supply chain disruptions?

2. What can Thailand do to regain manufacturing jobs lost due to the fear of future flooding?

OM in the News: Using Malaysia to Balance Supply Chain Disruptions

Jay and I are just finishing up the next edition of our OM text, and have added a good deal of new material on supply chain disruptions. So The Wall Street Journal (July 19, 2012) article on high-tech manufacturers flooding into Penang, Malaysia caught my eye. The journal writes: “Hangar after hangar at the bustling Penang airport is decked out in the liveries of shipping companies DHL, UPS, and FedEx each dedicated to flying out boxes of LED displays, chip sets and other sophisticated electronics. Following last year’s earthquake in Japan and floods in Thailand, global manufacturers are looking to Penang and elsewhere to broaden their supply chains for everything from car parts to semiconductors to hard-disk drives”.

Last year was a watershed for companies operating global supply chains. At the height of the disasters in Japan and Thailand, companies relying on JIT supply chains were left scrambling for alternative suppliers. The hardware industry was hit especially hard by the months of flooding in Thailand. With China’s labor market overheated, countries like Malaysia are seeing billions of dollars in new investments from techs such as Intel, Bose, Agilent, and National Instruments.

Why locate in Malaysia? The nation does carry political risk, as it is a Muslim country entering a period of political turbulence. But as the Journal adds: “Those tensions are relatively minor compared with those of some of Malaysia’s neighbors. The country sits safely away from the so-called Pacific Ring of Fire, mostly unaffected by the earthquakes and volcanoes that can afflict Japan and Indonesia. Malaysia also is less likely to fall victim to the kind of flooding that left Thailand’s economy flailing last year. Also helping Penang’s appeal are an international air hub and strong logistics infrastructure, including inexpensive and reliable supplies of electricity and pristine water”.

Discussion questions:

1. What location analysis factors do multinationals consider in deciding where to open a new factory?

2. What is the history of US firms locating in Malaysia?

Guest Post: The Rise, Fall, and Rise Again of the Bullwhip Effect

Today’s guest Post comes from Kelly Thomas, who is a supply chain management professional and executive at JDA Software.

Demand variability is among the most important challenges facing supply chain managers today. Demand variability that is not properly managed manifests itself in terms of the well-known bullwhip effect, which results in large inefficiencies. Jay Forrester first described the bullwhip effect in his seminal work Industrial Dynamics, published in 1961. This effect says that a change in independent demand at the consumer level leads to increasing swings in dependent demand at each point upstream in the supply chain. This effect held sway over supply chains since the beginning of the industrial revolution.

However, during the mid 2000s, it appeared that the bullwhip effect had been reduced; studies by the Federal Reserve show the bullwhip effect attenuating dramatically from the beginning of the 1990s through the middle 2000s. These studies attributed this to the widespread adoption of improved supply chain management practices and supporting information technologies. These same studies postulated the overall economy had entered a new era of lower variability.

As we know by now, the Great Recession of 2008-2009 and its lingering effects have changed a lot of this thinking. It appears the bullwhip effect has come back with a vengeance. Increasing variability caused by demand uncertainty, globalization, new product introduction, and escalating customer expectations have outstripped companies’ abilities to effectively manage their supply chains. This has led to increased interest in supply chain segmentation, driving the supply chain from independent demand, visibility and synchronization, and optimizing the use of production and inventory resources.

To support these needs, companies are now going through a technology refresh phase to support higher levels of sophistication in such areas as S&OP, demand management, order promising, inventory optimization, and customer collaboration. For example, companies such as Dell and Sony are transforming their supply chains to stay ahead of the variability curve.

OM in the News: Increased Efficiency From JIT Comes at a Price

Just as the recovery in US auto sales begins to accelerate, a fire last week at Magna International, a major auto parts manufacturer near Detroit, put a huge scare into five automakers. Two of them, GM and Mazda, had to close plants and stop making some models. Three others, Ford, Chrysler, and Nissan, faced the prospect of having to do without critical parts from their only supplier of ceilings, consoles, and other parts.

Yesterday’s Portland Press Herald (March 7,2011) writes: “The impact of the blaze shows how years of work to make auto plants more efficient can fall apart when something interrupts the flow of parts in an intricate supply chain”. As we discuss in Chapter 16, JIT has proven a wonderful system for 3 decades in the auto industry. Auto companies have cut costs and become more efficient by going to a JIT parts delivery system to avoid paying for huge stockpiles of parts.

But to avoid buying costly machinery, parts firms often make a particular part at only one site. As a result, plants have few parts in storage and are so dependent on every link in the supply chain that the whole system falls apart, as it did in this case, if production is interrupted at a single factory. These days most auto parts are “single-sourced”.

The story for Magna and its customers fortunately (and luckily) had a happy ending today. The company was able to work with its customers to get enough of the equipment up and running to allow auto plants to receive at least a portion of their needed parts. Our Ch.16 case study, “JIT After a Catastrophe” deals with how Caterpillar faced a very similar disaster when a tornado destroyed its Mississippi couplings plant in 2008.

Discussion questions:

1. How should the auto makers react at this point?

2. What should Magna do in planning for the future?