Natural Disasters Highlight Need for Supply Chain Risk Management

This has been a challenging winter. In addition to the earthquakes and tsunamis in New Zealand and Japan, harsh winter storms throughout North America have been disruptive to the smooth flow of people, goods and services for many companies. Looking back over the past few years, hurricanes, volcanic eruptions and tornadoes have also made life difficult for supply chain professionals.

It may be several weeks or months before the full impact of the tsunami in Japan, from an economic or supply chain perspective, is understood. As the world’s third largest economy, the images of cars and houses being swept along by powerful waves signal that there is widespread damage. The closure of airports and ports could have significant consequences.

Of course, disruptions to supply chains can come from factors other than weather or natural disasters. Quality control problems, piracy and export restrictions are just some of the factors that can come into play. To make matters worse, most of these disruptions are unpredictable in timing and scope.

Each shipper has to make an assessment of the potential risks to their supply chains. According to Patthira Siriwan, senior project manager for supply chain development in North America for Damco, the combined logistics brand for A.P. Moller-Maersk, supply chain risks can be categorized into five groups: operational, social, natural, economy and political/legal. Damco defines supply chain risk management as “attempts to identify risks and quantify their commercial financial exposures as well as mitigate potential disruptions at each node and lane in the supply chain”.

Supply chain risk models can vary from the rudimentary to the sophisticated. In the case of the latter, complex “what if” analyses can be performed. This allows the shipper to identify potential trouble spots and map out alternative supply chain strategies. In a recent article in the Journal of Commerce, Siriwan indicated that shippers tend to focus on “factors with the biggest impact on their supply chain, such as on-time performance, supplier lead time variability and carriers by origin or trade lane”. Shippers need to perform some sort of probability analysis on the impacts of each potential disruption, with a particular focus on alternative vendors, carriers, origin points and ports and destination ports.

Looking ahead to the balance of 2011, there are some major (predictable) risks that could drive up supply chain and transportation costs. These include the impact on fuel costs as a result of unrest in the Middle East. Rising labour costs in China could have the result of driving up manufacturing costs or extending lead times if China’s Insourcing initiative (moving manufacturing inland to lower cost locations) takes hold. This may cause some companies to look at other Asian countries as they contemplate making alternative sourcing arrangements. Then there is the fallout from the natural disasters in Japan that are still to be determined.

Each company needs to assess the potential risks to their company for each of the five elements outlined above. As a minimum, shippers should be evaluating alternate modes and carriers to make sure they have a range of quality options in place. In addition, each of these options should be tested under “real world” circumstances with actual freight to see if they are viable and dependable in a time of need.