A couple of headlines caught my attention this month because they highlight different types of supply chain risk.
- Boeing mulling new supplier system in case of natural disaster (from Reuters)
- Sharp to further localize solar-panel production overseas (from Wall Street Journal)
In Boeing’s case, the company is taking steps to minimize supply risk, especially in the wake of a natural disaster like the Japan earthquake earlier this year (Japanese companies produce about 35 percent of the components for Boeing’s Dreamliner). According to the article:
The CEO of Boeing Commercial Aircraft, Jim Albaugh, said the company is looking hard at its supplier relationships and the possibility of dual-sourcing critical parts.
“We want to make very sure that in the future we have a production system that is not impacted by natural catastrophe that could occur anywhere in the world,” Albaugh told reporters on the sidelines of an event hosted by the company in Tokyo’s Haneda airport.
Simply put, Boeing is now making its own luck when it comes to supply chain resiliency. As I wrote back in April, “More than likely, if you’ve emerged relatively unscathed from a supply chain disruption, it’s because you’ve taken action ahead of time to eliminate the risk, minimize the impact, or ensure a rapid and effective response.”
Dual-sourcing critical parts is a well-known strategy, one of the many leading practices companies have implemented to minimize the risk of supply disruptions. But how do you define a critical part?
In many cases, companies take a spend perspective—i.e., they look at the 20 percent of the parts or suppliers that account for 80 percent of their spend. But as Bindiya Vakil and Hannah Kain highlight in a soon-to-be-published paper, this is one of the top five mistakes companies make in managing supply chain risk effectively. As the authors point out:
It is easy to lose sight of the long tail (80% of suppliers representing 20% of spend), especially if there is a lot of single sourced or custom material in the low spend category. Custom paint, connectors, power supplies and other low spend items, and even some kinds of labels with no alternate source, can become single points of failure in the supply chain.
This is a lesson Boeing has already learned, when a shortage of nuts and bolts back in 2007 caused delays in the production of the Dreamliner (one of many delays that has plagued the project since).
Moving on to the other headline, Sharp’s decision to localize production of solar panels is related to both currency risk and competitor risk. The following excerpt from the WSJ article sums it up nicely:
Sharp Corp. plans to localize more of its solar-panel production outside Japan as the strong yen makes exports too expensive while fast-growing [and lower-cost] Chinese makers create a global inventory glut.
“We need to change the way we manage our businesses so that foreign exchange movements won’t affect us as much,” said Sharp President Mikio Katayama in an interview. “In particular, in energy businesses like solar cells, we are trying to fully localize our operations” in each region, he said.
One of my predictions for 2011 was that currency risks would continue to impact supply chains (for related commentary see here and here). Although China’s monetary policy has been a topic of much debate for several years, the situation in Europe and the euro (the bailout of Greece, growing debt issues with Italy, Spain, and Portugal) is dominating the news these days, as is our own debt and deficit spending here in the US.
Simply put, if your CFO is not part of your supply chain strategy team, and you’re not taking monetary risks into consideration when making sourcing and network design decisions, you’re playing with fire.
The Sharp story also points to another type of risk: legislative or regulatory risks. As the article mentions, “Solar-panel demand in each country depends largely on how much the government supports and promotes renewable energy. Stronger local demand also helps solar-cell makers boost output, cut costs and become more competitive globally.”
Evergreen Solar Inc. announced on Monday that it is running out of money and is in danger of being delisted from the Nasdaq exchange because its stock has been trading below $1. As mentioned in a Boston.com article, “[the] company said it wound up losing money on every solar panel it made in Massachusetts as prices plummeted because of increased global competition and tepid demand in the wake of the economic slowdown.”
Part of the “tepid demand” stems from the fact that, despite much rhetoric from the Obama administration, cap-and-trade legislation never went anywhere. In other words, there was much speculation that state and federal legislation would usher in a “green” economy, boosting demand for alternative energy sources like solar and wind, but that has yet to occur, at least not to a significant (economically-viable) extent.
In short, legislation that never passes can be just as risky as legislation that does.
The bottom line: Risk is supply chain’s middle name these days. Companies that manage supply chain risks effectively will outperform those that ignore or are blindsided by them.
