Newsletter Sign-up

By CYRIL TUOHY, managing editor of Risk & Insurance®

VANCOUVER---If there's one lesson risk managers should take from the 9.0-magnitude earthquake that struck March 11 off the coast of Japan, it is that management should secure the supply of parts critical to manufacturing rather than parts used in high volumes.

A supplier of a tiny part considered critical to the function of every car--couplings for example--is absolutely vital even if the part on its own has little value, said Robert M. Reeves, a partner with Ernst & Young LLP.

"Don't overlook the small items," Reeves said.

Even as Gier and Reeves were briefing risk managers on the best practices for securing the supply chains used to make cars, Honda on Monday warned its U.S. dealers to expect shortages later in the summer of the popular redesigned Civic model. The company also announced that production problems connected with the quake would delay the fall introduction of the refreshed 2012 CR-V small crossover. Honda is running short of chips, sensors and other parts supplied from Japan for the North American-manufactured vehicle, according to news reports.

Toyota Motor Co. last month said it will have to stop production at several plants in Japan and around the world for days to allow for the rebuilding of the supply chain in the wake of the Tohoku quake.

LOCATION, LOCATION, LOCATION

Gier, Reeves and Aaron Howes, director of insurance for Expeditors International of Washington Inc., stressed the importance of a geographically diversified supplier base and urged risk managers to consider "a more obscure alternative" in developing contingency plans.

A company with a contingency plan that calls on a back-up supplier located in the same region as a primary supplier is likely to be faced with parts shortage as competitors are likely to have thought of relying on the same back-up supplier, the experts said.

"Avoid the obvious solution and go with a more obscure alternative," Reeves said.

Assessing supply chain risk is a "continuous" process, the experts also said, and a single-source supplier model may make sense for a manufacturer at a particular time, but six months later that manufacturer may well get hit with supplier constraints.

Having trouble with supplier can sometimes mean re-engineering a product, and that turns a $30 million problem into a $100 million problem, Reeves said.

"Get the logistics people involved in the assessment," he added.

Risk managers in the audience also noted that, if manufacturers have to rely on one source, then a sound risk management strategy is to make sure the supplies are not all coming from one place--a strategy commonly referred to as not putting all your eggs in one basket.

May 3, 2011

Copyright 2011© LRP Publications