Volcanos and other risks

Predictably, there are stories in the news about how the volcano in Iceland is disrupting world supply chains  (e.g., BBC story on Nissan and BMW).

One of the trends over the last 20 years is to source globally and to source from fewer suppliers. The reasoning is good. By sourcing globally you find the supplier with the lowest costs and best skills/technology. By sourcing from fewer suppliers you avoid variation in your products and you are better able to concentrate improvement efforts, both in the design of the component as well as in the manufacturing process. But the strategy also means that you become more vulnerable to idiosyncratic risk.

As risks go, this one is relatively mild (that a volcano erupts under a glacier sending ash into a big cloud that blankets Europe).  Assuming the volcano stop spitting ash into the sky soon, the consequences of this disruption are rather limited – about 7-10 days of lost production. This is a significant disruption, but nothing compared to the disruption that would occur if your supplier’s facility were buried in ash. Put another way, the risks to really worry about are ones that disrupt your supply chain for a much longer period of time – hurricanes, floods, earthquakes, lightning/fire, and domestic unrest all come to mind as potentially more severe in the sense that they can knock you out for months. Thus, I would be much more concerned about sourcing from a supplier in Indonesia (earthquake and volcano prone) than a supplier in Ireland.

The first step to managing these risks is to identify them – you can’t manage what you don’t know. (Or put another way, it is harder to manage “unknown unknowns” than “known unknowns”.)

The second step is to establish a monitoring system – when would you know if a supplier in your network has been disrupted? We all heard about the volcano in Iceland, but when would you hear if a key Tier 2 supplier had a fire in their facility? The sooner you know, the sooner you can get to step 3…

The third step is to have a contingency plan in place. Do you have potential second sources of supply? What assistance can you provide to shorten the length of the disruption?

To conclude, disruption risk is real, but it doesn’t mean that you shouldn’t source globally for a limited set of suppliers.


One Response to Volcanos and other risks

  1. Mounir R. Baalbaki says:

    Speaking of step 3, the flipside of disruption risk is that some suppliers are getting orders for they never expected… A salmon farm in New Zealand received an order for 500 tons of salmon from a client in Dubai whose orders typically never exceed 50 tons. One can imagine countless similar scenarios around the world. In this case, monitoring systems can help businesses capitalize on such unexpected surprises by retaliating swiftly.

    It would be interesting to get real figures for cumulative economic losses beyond the effect on Europe, and other than the narrow travel industry-focused IATA numbers.

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