On March 11, 2011, Japan was hit by the most devastating earthquake in the country's history, considered the worst crisis faced since World War II. With a magnitude of 9 on the Richter scale, the earthquake caused a nuclear disaster in Fukushima and triggered tsunamis that devastated cities. The catastrophe resulted in more than 15 deaths, 3 missing, destruction of cities, roads, bridges and dams, lack of water and electricity in millions of homes, fires, flooding of crops and hundreds of thousands of people were displaced from their homes. . The World Bank estimated an economic cost of $235 billion, making it the costliest natural disaster in history.
Figure: The Japanese started to work in partnership with their suppliers to avoid disruptions in the chain, as happened after the 2011 earthquake. Source: Fabrizio Chiagano on Unsplash
At the time of the disaster, several multinationals felt firsthand the price to be paid for weaknesses in their supply chains. While many were able to assess the impact on their 1st tier suppliers (direct suppliers), they were caught off guard by the effects on their suppliers' suppliers (those 2nd and 3rd tier).
Today, in the midst of chaos of the Covid-19 pandemic, supply chain teams experience this same difficulty: procurement professionals struggle to make raw materials available and secure sources of supply. However, in many companies, the lack of information has turned this work into a series of reactive and uncoordinated tasks.
During those difficult days in 2011, for example, Toyota employees worked day and night for three weeks to be able to estimate the size of the chain damage. Production was halted for two weeks, then scaled back for another six months. Since then, resilience in the supply chain has been worked on by the company, seeking to mitigate the risks associated with possible new disasters.
The value of visibility
The 2011 episode meant that, in 2013, Toyota began working with its suppliers to develop what it calls the “Rescue” system: a large database with the mapping of suppliers of each component used to assemble a car (they are around 30 components are needed for this). The base, with 650 mapped supplier plants, allows the company to be able to quickly identify risks of supply interruption to generate contingency plans.
And this mapping effort has proven to be valuable. Later, when new earthquakes occurred, the company was able to quickly measure the impact on the chain; in some cases, in just half a day. By having visibility into its chain structure, Toyota is able to understand which suppliers of which components, in which locations, are at risk, and act as quickly as possible to secure alternative stocks and capacities.
Why aren't companies prepared today?
It is a fact that having the supply footprint mapped is of vital importance for the resilience of a company's supply chain. It is a fundamental action for mitigating risks in the chain, and managers are aware of this. So why aren't companies better prepared today?
One reason is the level of resources and time required to perform this mapping. After the 2011 episode, a Japanese semiconductor company says it needed to employ a team of 100 people for more than a year to complete a complete mapping, including the “sub-levels” of suppliers (suppliers of suppliers and so on).
A second reason is the fact that procurement's role is traditionally measured by reducing costs, which is very different from securing revenue. Thinking only about the cost driver, a company may end up working with few or even just one supplier for relevant components. This can happen because the price of one of the suppliers is more attractive, because the company may not have enough volume to consider more suppliers, or it wants to concentrate all the volume on one supplier to reach better negotiations, because it wants to reduce the effort of homologating new suppliers. , and so on. This reasoning is fully understandable, but its trade-off of increased risk is also clear.
A third reason, which sounds cliché, but which is perhaps the most relevant, as it permeates the other two, is the company's culture. An example is General Motors. With the events of 2011, the company realized that its BCP (Business Continuity Planning) was too tactical, so it made structural changes and, today, risk management in the supply chain is a strategic function in the company.
One of the mechanisms used by GM is the “Blind Spot Workshops”. In these workshops, the company's executives answer the following question: “What keeps you awake at night?”. As a result of these working meetings, the 30 most relevant risks are identified, and these are delegated to functional leaders. In addition to changes in processes and people, the company also invested in technology and analytical tools, and the efforts paid off: when a grade 7 earthquake hit Japan, it took GM just 6 hours to assess the impact on the chain.
The strength of culture at GM is such that it went beyond internal processes, reaching even its suppliers. The company reports that direct suppliers (1st tier) come to the company when they are concerned about their own suppliers (GM's 2nd tier suppliers).
there are no shortcuts
Carrying out the mapping of suppliers, including their sub-levels, is laborious, takes time and resources. More arduous than the mapping itself is creating the necessary engagement with suppliers, and, above all, it needs to start from an internal culture so that it has substance. Companies that invest in these types of efforts reinforce business continuity, as they are ensuring that, in a few hours or days, it is possible to understand how their supply chain will be impacted for months or even years. In the moment we live in, in which supply chains are globally dispersed, resilience in the supply chain is an expression that must be cultivated.
And your company? How has this crisis driven you and your team towards greater resilience in the supply chain? Share with us on the ILOS social networks! A hug!
References:
Harvard Business Review – Coronavirus is a wake-up call for supply chain management
Automotive News – How Toyota applied the lessons of 2011 quake
Thatiana Nomi
5 years of experience in consulting projects in Logistics and Supply Chain. Worked on logistics network optimization projects, service cost, logistics master plan, inventory policy definition, sales forecast, S&OP (Sales and Operations Planning) and transportation planning and management.
