Friday, 23 April 2010

Has Volcanic Ash Lessons For Logistics?

Warehouses put money to sleep, pithily remarked one Toyota vice president, but idled assembly lines can cost far more. This is now the prospect that faces car production plants worldwide as air-freighted key electronic component supplies dry up, caused by the Icelandic volcanic ash cloud which grounded all flights to much of Europe for five days.

Some 40 years ago such a world-disrupting event would not have raised a logistics eyebrow because all factories had some buffer stock that would tide them over for weeks or more and/or relied on locally-sourced parts. But in today's globalised markets, typified by dependence on complex worldwide supply chains geared to Just-in-Time (JIT) deliveries, that is no longer an option but the Icelandic event does, at least, spur a rethink of JIT techniques. But what, if any, changes should be made to stretched supply chains, particularly with respect to JIT?

Doubtless, expansion in global trade, partly underpinned by JIT, has done wonders to reduce world poverty. The most globalised countries, like Chile, China, Thailand and Bangladesh, to which much Western manufacturing has been outsourced, have grown the fastest and benefited the most. This helped cut world extreme poverty, defined as less than $1 a day, from 28% to 21% between 1990 and 2001, while infant mortality rates between 1980 and 2002 fell and life expectancy rose in low and middle-income countries. If only for that reason, JIT and globalisation are here to stay but vulnerability to disruption much be reduced.

Airfreight may only account for a tiny fraction of freight by weight --about 0.5% for the UK, but in value terms it is 25% and for Ireland 30%. Most UK car makers use suppliers near their factories and mainly road and sea for most deliveries, but high value electronic components come by air from far-flung places where production costs are much lower.

A case could be made for manufacturers to stock higher levels of these small electronic components at point of assembly and use more road/sea deliveries. While this would add to logistics costs it would be far cheaper than idling whole plants for the want of tiny components or, worse still, losing overseas markets to unaffected, opportunistic suppliers. As explained by the Irish Exporters Association's chief executive, John Whelan, "the big thing is to hold onto your customer base. Asian suppliers will try to grab US customers of European exporters and US suppliers will do the same in Asia."

The Icelandic event may be a rare occurrence and so prompt many to deride any calls for higher stock levels of air-freighted items. However, JIT-orientated manufacturers are exposed to a legion of disruptive supply risks and just one, tiny, isolated incident can be highly damaging. One of the most unlikely examples was the collapse of a container crane at Southampton Container Terminal in 2006. It disrupted parts supply to Honda's Swindon car plant so much that the whole plant was closed temporarily.

There are, of course, techniques for efficient disaster recovery, anticipatory measures and production philosophies that could sidestep or ameliorate supply chain disruption. Useful guidance on this can be found in Yossi Sheffi's book, The Resilient Enterprise.* As the book explains, insurance companies have well-developed models of the likelihood of earthquakes, floods, hurricanes and tornadoes for America and other countries. Volcanic eruptions are usually preceded by tremors but these signs are often dismissed or ignored by managers. Supply chain managers need not become Earth scientists but they could do better by reacting faster to top up critical item supplies by air before it is too late.

In time, the global supply chain environment could be expected to change for the better in terms of JIT risks. More global corporations see the value of locating their manufacturing and supplier base close to their main markets. Not only does this reduce supply chain risks it also enhances quality control and faster response times to customers' changing demand patterns. It seems customers require products faster than supply chains can respond. The growing prosperity of Third World countries like China will also erode their cost advantage, while transport costs will also rise.

On top of all this is the joker in the pack -- environmental concerns. Although the jury may still be out over the causes of global warming, the vociferous environmental lobby should not be underestimated. New legislation through tax disincentives, et al, would discourage far flung global supply chains. As to whether that would economically harm industrialising countries, and so pose political risks, only time will tell.
*The MIT Press, Cambridge, Massachussetts, 2005

No comments:

Post a Comment