disaster planning – The OM Blog by Heizer, Render, & Munson

OM in the News: Ford Discovers a Damaged Supply Chain

“Ford expects to lay off several thousand workers temporarily at a Michigan factory that assembles its top-selling F-150 pickup truck after a fire last week damaged the premises of a parts supplier,” reports The Wall Street Journal (May 9, 2018). The blaze, which occurred at a Michigan plant operated by Meridian Lightweight Technologies, has already disrupted production of Ford’s pickup trucks at a factory in Missouri. Meridian is an automotive-interiors supplier owned by China’s Wanfeng Auto Group, which makes components for Ford and other car makers. Ford’s F-150 factory in Dearborn, Mich., is expected to run out of Meridian-supplied parts and halt production as early as Wednesday.

Ford’s other main F-150 plant, in Kansas City, Mo., would be idled this week because certain parts are in short supply after the fire. The two plants, which together employ 7,600 people, could face several weeks of down time as the auto maker seeks ways to make up the parts shortfall.

The F-150 is Ford’s best-selling vehicle and generates the bulk of its global profit. A prolonged shutdown of the plants could dent revenue and profit. The two plants combined produce 10,000 to 15,000 F-150s a week. The company would face cost pressures from paying workers during idle time and while ramping back up to offset lost production. The fire also disrupted production at a Fiat-Chrysler Automobiles minivan plant in Windsor, Ontario, and a BMW sport-utility factory in South Carolina.

Classroom discussion questions:

What are the advantages and disadvantages of a single-source supplier?
What strategy (see Supplement 11) might Ford employ?

OM in the News: Humanitarian Efforts of a Houston Supermarket Chain

A flooded H-E-B store. Three of the chain’s 83 stores in Houston will need to be rebuilt; the interior of one store shown.

One of the colleges within the POMS academic society is called Humanitarian Operations and Crisis Management. Hurricane Harvey, which slammed Houston, provides a great example of how OM steps up to the plate in times of a disaster. At a time when retail watchers question the future of brick-and-mortar stores due to Amazon’s continued ascendance, retailer H-E-B is drawing widespread praise after managing to open 60 of its 83 stores in Houston, hours after the hurricane struck, writes LinkedIn’s Work in Progress (Aug. 2, 2017).

When employees couldn’t get to work, some stores still operated with as few as 5 people: one stationed at the door as crowd control and 4 working the registers, trying to get people out as quickly as possible. The behind-the-scenes operation is a complicated dance involving multiple command centers, a helicopter, private planes, military style vehicles and frequent calls to suppliers, urging them to send toilet paper.

Here are the word’s of H-E-B’s Houston president: “Coming out of a hurricane, if there’s been flooding, they’re going to want mops and bleach. I’ll take all the bread I can possibly get. Then you’re going to start to get produce. We don’t care about flowers in the middle of a hurricane. You only have so many trucks and so much space. We brought over 2,000 partners from Austin, San Antonio, the Rio Grande Valley. They hopped into cars and they just drove to Houston. For 18 hours a day, they’re going to help us restock and then they’ll go sleep on the couch at somebody’s house. We’ve called P&G and said: Send entire trailer loads of toilet paper directly to our stores. Bypass our warehouse, so you can just get it to us. I called Frito-Lay and said manufacture your bestsellers. I need Lay’s, I need Doritos, I need Fritos. I won’t turn down any delivery. We’ll take it as fast as we can.”

Classroom discussion questions:

How was H-E-B able to reopen so quickly?
What OM tools can be used in times of a disaster?

OM in the News: Planning for Japan’s Next Earthquake–The Really Big One

A huge earthquake in the Japan’s industrial heartland — costing as much as 40% of GDP and disrupting supply chains at companies such as Toyota — is seen as inevitable, reports The Financial Times (May 19, 2016). Understanding the risk and reducing damage is critical (as we discuss in Supplement 11). The recent magnitude 7.3 earthquake in Kyushu, which killed 49 and destroyed thousands of homes, is a reminder that Japan remains exposed to frequent natural disasters. But a big earthquake directly below Tokyo, in the Nankai Trough, would be an economic shock of global significance. The government puts the odds of a magnitude 8.0-plus Tokyo earthquake at 50% in the next 20 years, 70% in the next 30 years and 90% in the next 50!

A Tokyo region earthquake could be more devastating than the one in 2011 at Tohoku, which left 18,800 dead, thousands homeless and crippled the Fukushima nuclear facility. The global impact of the Tohoku earthquake surprised many. Car plants as far afield as Louisiana and Ohio had to halt production for a lack of parts, from microcontrollers to paint.

Yet Tohoku is on the periphery. Tokyo is a manufacturing heartland, a link in some of the world’s most important supply chains. Fanuc, the world’s leading maker of industrial robots, is based in the region, as are 1/2 the world’s musical instruments (manufactured by Yamaha and Roland), and 1/3 of the world’s Nand Flash memory (by Toshiba), built into every smartphone. But even in this region, two supply chains stand out: it is home to Toyota (which makes 1.6 million vehicles a year there) and to most of Boeing’s Japanese suppliers (which make the 777 and 787 fuselages).

Japanese business learned a lot from the Tohoku disaster. Companies changed their supply chain systems to increase redundancy and have extensive continuity plans. However, even if Toyota’s own plants managed to restart quickly, they are only as resilient as their weakest subcontractors and the regional infrastructure of roadway, ports, and airports.

Classroom discussion questions:

What can firms like Boeing do to protect their fuselage supply chain?
What models in Supplement 11 can be used to deal with this problem?

OM in the News: Earthquakes in Japan Expose Supply Chain Fraility

Toyota is halting vehicle assembly across Japan due to earthquake disruptions at an auto-parts supplier, a move that recalls prior supply-chain interruptions — Toyota is halting vehicle assembly across Japan due to earthquake disruptions at an auto-parts supplier

“The vulnerabilities of the tight production supply chains at Japanese companies including Toyota, are back in the spotlight after earthquakes in Japan forced several to curtail output this week”, writes The Wall Street Journal (April 19, 2016). Toyota’s decision to shut 26 car assembly lines this week nationwide due to production halts by a supplier shows how the auto maker’s lean manufacturing system, often viewed as a model of efficiency, can be impacted by disasters. The latest shutdowns drew parallels to the aftermath of Japan’s 2011 earthquake and tsunami.

This is the second time in 3 months that Toyota has had to stop production in its Japanese plants after supplier troubles. The earthquake-affected supplier, Aisin Seiki, made door and engine components, and Toyota has yet to decide when it would resume operations. In February, Toyota lost production of 80,000-90,000 vehicles over a week-long halt after an explosion at a steel supplier. That shutdown weighed on Japan’s industrial output, which fell 6.2% that month.

Shutdowns occur largely because of Toyota’s JIT inventory system, a philosophy at the core of its efficient production method. By keeping as little inventory on site as possible, storage costs can be cut and component quality can be consistent. Toyota plants hold several hours worth of inventory for many parts, relying on a steady feed from suppliers. If suppliers suffer a disaster, Toyota can quickly run out of components.

After 2011, Toyota ensured that multiple suppliers are manufacturing each component. To assess risks, it built a database on suppliers, including on companies down the supplier chain. It also pushed suppliers to diversify production, and compiled scenarios on how parts production could be shifted to different locations in case of emergency.

Classroom discussion questions:

What are the advantages and disadvantages of Toyota’s JIT system?
Do U.S. firms face the same challenges? How?

OM in the News: Planning for Disasters

One of the less discussed responsibilities of the operations management team is planning for a natural disaster (a topic we note in Chapter 11 and Supplement 11). Yet as we saw with the tsunami and earthquakes in Japan, and with flooding in Malaysia, disasters can destroy a business. Few businesses, especially smaller ones, have continuity plans. The New York Times (Oct.8, 2015) estimates that 40-60% of small businesses never recover after being hit by natural disasters. The best protection is developing a continuity plan that plots out responses to different disaster situations. It targets the biggest business risks and critical functions that keep revenue flowing. Continuity plans that are never used can even help improve business profitability, says the book Prepare for the Worst, Plan for the Best.

The process can be broken into 5 steps. They include keeping track of resources, inventory, personnel and physical sites. The plan should be written and stored in the cloud, as in a Google document, so it can be retrieved anywhere.

Step 1 is analyzing a business’s critical functions. Many businesses just focus on the technology part, without considering customers, products, suppliers and employees that need to be protected.

Step 2 is focusing on risks that could topple the business. These risks could be damaged inventory, lost data or irate customers. How would crucial assets be affected? What would happen if the business was closed for 1 day, 1 week?

Step 3 creates strategies to protect crucial parts of the business. For example, manufacturers might want to think of alternate suppliers. Company inventory can be put in more than one location. Customers can be contacted via text messages, Facebook or email. Employees can stay connected by using a list compiled in advance. Data can be protected by storing it in the cloud.

Step 4 is testing the plan. This is the most-forgotten step. Finally, in Step 5, plans should be updated every year, including the contact list.

Classroom discussion questions:

Discuss the issues a restaurant would face in disaster planning.
Do companies you are familiar with have such a plan?

Good OM Reading: Supply Chain Resilience

Semiconductor companies shaken by earthquakes; transportation companies battered by weather; retailers outwitted by rivals — nearly every company has endured some type of catastrophe, and then learned from its experience, disruption after disruption. For example, GM became more resilient with every crisis it faced, from the bankruptcy of its strategic supplier, Delphi, in 2005 to the Japan earthquake in 2012. “Technology is an increasingly important tool in the arsenal of resilience” writes MIT Sloan Management Review (Oct., 2015) .

From sensors to cloud computing to social media, various technologies can help prepare for, detect and manage disruption. Sensors can warn of impending events, from industrial accidents to earthquakes. When interconnected into Internet of Things networks, these smart devices can alert employees to a potential or existing disruption. During and after disasters, every human being on the scene can now be a sensor. Social media channels can provide an informal, real-time damage assessment. But even as technology makes it easier to detect and manage risk, it is also a major source of risk. A cyber-security breach can disrupt as much as an earthquake can– as the many retailers that fell victim to digital theft discovered in 2014. A large part of the problem is not rooted in sophisticated penetration of firewalls, but with insiders whose mobile devices are infected inside the firewall.

Collecting information from every source — weather reports, sensors, industrial intelligence — is only half the job. What organizations do with the information is key. The technology will sound the alarm, but the decision-making process that ensues is the real issue. Consider the actions taken by dispatchers when alerted to an earthquake in Mexico City a few years ago. Those empowered employees were able to shut down the subway system 40 seconds before the earthquake hit, avoiding a possible disaster. Employee empowerment illustrates a key difference between resilient and non-resilient companies: Resilient companies delegate to the lowest level. They organize in advance for disruption and consolidate crucial information in an emergency operations center. With the increasing use of cloud technologies, these centers can be virtual so that employees can work on the disruption, even from home.

OM in the News: The Probability of a Disaster

Let’s say Bob is jetting from Heathrow to JFK on a Virgin Airways A330. Chance of crashing? One in 5.4 million. That means that he could apparently expect to fly on the route for 14,716 years before plummeting into the Atlantic, writes The Economist (Jan.29, 2015). The 14,716 years figure might cause your students a bit of confusion. It’s the average length of time people will fly before crashing, if lots and lots of them do it every day. An alternative way of expressing it would be to say that if you were to arrange to fly this route every day for the next 10,210 years, your chance of dying would be 50%. And if you wanted to book enough flights to be almost certain of crashing, you reach a 99% probability at 67,833 years of daily flights.

Safety statistics collated by IATA, the airline association, show that in 2013 more than 3 billion people flew on commercial aircraft. During that time, there were 81 accidents and 210 fatalities. What is more, this figure has been falling for years. By way of comparison, the World Health Organisation says there were over 1.2 million road traffic deaths around the world in 2010. It is the leading cause of death among 15-29 year olds. Oxford University calculates that in 2006, a British resident had odds of 1 in 36,512 of dying in a motor accident and 1 in 3.5 million dying in a plane crash.

The deadliest plane crash in history occurred in 1977 in Tenerife when 583 people were killed after two jumbos collided on the runway. Yet, that many people die from heart disease in the U.S. every 8 hours. As the book How Risky Is it, Really explains, air crashes are considered catastrophes while heart attacks are not, because they fulfill 3 criteria: “A catastrophe has to be big, it has to happen all at once, and something about it has to be calamitous—disastrous—really bad. A plane crash kills a lot of people all at once, in one place, and in a really horrific way. But heart disease meets only one of those criteria.”

Classroom discussion questions:

1. How does this concept impact supply chain disruptions that we discuss in Supplement 11?

2. Why are probabilities such as these important in operations management?

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: 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?