On May 20, FM Global, the insurance company, released the 2016 update of the well-regarded Global Resilience Index that gives particular attention to supply chains. According to the update:
Supply chain resilience is vital to robust business performance. Threats to resilience—such as depressed oil prices, natural catastrophes and the spread of terrorism—are keeping financial executives around the world up at night.
In an interview with FEI Daily, the CFO of FM Global offered the following judgment:
FEI Daily: What can be done to mitigate risk when it comes to selecting suppliers and siting facilities?
Jeff Burchill: The first step is to understand the supply chain risk inherent to the region you’re looking at. That’s what the Resilience Index helps you do. Conducting all that research yourself without a tool like the Index would be a tremendous undertaking for any individual. However, regardless of how you gather the information, such data helps you be more prudent as you go about making supply chain decisions. For example, we see a lot of executives wringing costs from their supply chains and making them lean – often too lean. When you’re too lean, especially in a high-risk region, your supply chain can get brittle and prone to disruption. For example, tight production supply chains were blamed for Toyota’s shutdown after the April earthquakes in Japan.
So to mitigate risk, look at every link in your supply chain, how likely it is to break, how much money your company would lose if it did, and your options for avoiding disruption.
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Chartered Institute for Procurement and Supply (CIPS) working with Dun & Bradstreet has also developed a quarterly global supply chain risk index. In their report on the final quarter of 2015, the researchers found -- among much more -- that, "In China, risk is related to regions where industry has considerable over-capacity and local governments have propped up employment through their influence over local banks, raising both the risk of corporate defaults in the longer term, and higher credit risk." This macro-factor can obviously have a whole host of micro implications.
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Seismic activity in southeastern Japan during the middle and second half of April caused death and destruction. According to Reuters, "Factories for major manufacturers including Toyota, Sony and Honda were closed, disrupting supply chains around the country."
Since the March 2011 Triple Disaster most Japanese manufacturers have given increased attention to operational resilience. Despite this, several of the best were hit hard by the April earthquake. Writing in Forbes, Jonathan Webb explains that Toyota, "suspended production in 26 out of 30 production lines in Japan as inward components ceased to flow from wounded suppliers. 80,000 units have been impacted. The cost of the current quake could reduce operating profit by 30 billion yen ($277 million)."
On April 22 General Motors announced that it was "taking proactive steps to mitigate a part supply issue and is adjusting production schedules at four of its North American assembly facilities. The manufacturing operations at the following GM North America assembly facilities are currently expected to be down for two weeks beginning April 25, 2016: Spring Hill, Tennessee.; Oshawa Flex Assembly, Canada; Lordstown, Ohio; and Fairfax, Kansas."
On April 22 General Motors announced that it was "taking proactive steps to mitigate a part supply issue and is adjusting production schedules at four of its North American assembly facilities. The manufacturing operations at the following GM North America assembly facilities are currently expected to be down for two weeks beginning April 25, 2016: Spring Hill, Tennessee.; Oshawa Flex Assembly, Canada; Lordstown, Ohio; and Fairfax, Kansas."
The supply chain effects of the earthquake were still being experience in late May. Several component manufacturers did not expect to return to full production until late June or July.
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A few weeks before the earthquakes GT Nexus and YouGov released the results of a December survey that found:
- 40% of manufacturers have been impacted by a supply chain disruption in the last 12 months
- 27% said keeping up with customer demands is their number one supply chain challenge
- 12% said their primary challenge is dealing with the high level of risk in global markets
- 11% said having a globally dispersed network of partners is their top challenge
The report's authors also found and argue: "Despite such high levels of risk and uncertainty, it was surprising to find that only 24% of respondents currently have a Chief Supply Chain Officer in place. That leaves 76% without a strategic leader and visionary at the helm. Lack of a C-level leader limits innovation and strategic transformational initiatives."
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Yet another angle on global supply chain risk is offered by BSI, once upon a time the British Standards Institution. Their spring update calls-out the biggest threats to the global supply chain as:
- Global cargo theft cost estimated to grow by a further $1 billion in 2016, with increased concerns in China, Germany, India, Mexico, South Africa, and United States
- Continued tensions in South China Sea predicted to lead to further protests and disruptions
- On-going conflict in Syria will continue to impact supply chains including the migrant crisis will continue to lead to port disruptions and European Union/Schengen border controls predicted to have far-reaching impact.
- ISIS is predicted to remain a significant threat to disrupt supply chains
- Labour unrest in China is predicted to persist, as a slowdown in the Chinese economy continues and more jobs move to neighbouring countries.
- Weather disruptions e.g. La Nina phenomenon
- Global health crises e.g. Zika and Ebola.
As the increasing number of supply chain risk products suggest, the hidden costs of network disruptions are not as hidden as just a few years ago.
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