C&B Notes

When Supply Chains Break

This article in Fortune highlights the importance of being prepared for unforeseen events.  Manufacturers have spent years building lean global supply chains, but have underestimated the resulting opportunity costs.  Natural disasters are showing them just how delicate these networks really are.

The twin tragedies in Asia have shone a spotlight on the often anonymous but incredibly important niche companies whose products and parts go into every MacBook or Prius. Invented by Toyota Motor Corp. and perfected in the era of globalization, the lean supply chain completely decentralized manufacturing:  Big manufacturers developed a multinational network of specialists to supply them with parts and to make sure those components arrived at assembly plants at the moment they were needed. When things go as planned, the system benefits everyone in the chain: The assembly plant is more efficient (no pesky inventories to manage), suppliers keep the cost of parts down by locating in regions with cheap labor, and consumers enjoy lower prices.

But natural disasters such as the earthquake and tsunami reveal just how fragile this carefully crafted ecosystem can be.  As Bob Ferrari, a leading supply-chain consultant, puts it: “You never want to hear about the guys who run the supply chains for multinational companies. When you do, usually it means something really bad has happened.”

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Not surprisingly, the events of 2011 have forced many manufacturers to rethink their global infrastructures. “These recent ‘Black Swan’ or unprecedented natural disaster events have obviously exposed vulnerabilities among industry supply chains,” says Ferrari, the supply-chain expert. “The question now is, has the quest for lowest-cost production and hyper-lean supply chains overridden and exposed vulnerability to significant business risk?”

It is a big, knotty issue for CEOs: Are bottom-line-oriented executives prepared to pull back from a system of low-cost suppliers and “just in time” manufacturing in favor of a more old-fashioned model that has plants squirreling away components for a rainy day, or, more dramatically, investing in backup facilities?

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