Emerging Risk Management Tools, Techniques, and Approaches • 231
Before proling the nancial impacts of the ood, let’s talk about the
back story. At some point multinational companies concluded, aer tak-
ing into account labor, taxes, freight, logistics, and government incentives,
that costs in ailand’s made it an appealing location. If someone had
taken the time to develop a complete supply chain map with a 100-mile
radius, he or she might have noticed that many suppliers, particularly in
the computer hard drive industry, were located in a 100-year ood plain.
Actually, some must have recognized this minor detail since some sup-
plier facilities were built 6–10feet above the ood plain. Although those
plants did not get ooded directly, it became impossible to move material
in and out of these facilities.
e impact from this ood was, unfortunately, impressive in its scale.
More than 660,000 people were forced out of work and 9,859 factories
were shut down. In the auto industry, 6,000 automobiles per day were
not built. In the camera industry, Nikon eventually lost $786 million in
sales; Canon had $604 million in lost sales; and Sony had recovery costs of
$107 million in a single quarter. And in the computer hard drive industry,
iMac launches were delayed and hard drive prices skyrocketed by 100%.
Many foreign companies, having witnessed rsthand the risk of locat-
ing too much of their production and supply chain in one location, have
shied production to countries other than ailand. Western Digital
Corporation, a U.S. company that is one of ailand’s largest employ-
ers, moved some hard- disk drive component manufacturing to Malaysia.
e company also asked some of its suppliers to take similar steps. Nidec,
a company based in Japan, shied part of its production of hard- disk drive
motors to China and the Philippines.
7
ese are not isolated examples.
CREATE A FLEXIBLE SUPPLY CHAIN
We may not realize it yet but a concept called exibility may become our
new best friend when managing risk. It is certainly a concept that is receiv-
ing attention in the popular press as well as from supply chain managers.
A Global Supply Chain survey conducted by PricewaterhouseCoopers
(PwC) concluded that 64% of respondents plan to implement greater ex-
ibility to better respond to supply chain challenges, making exibility a
top supply chain priority.
8
232 • Supply Chain Risk Management: An Emerging Discipline
Even though exibility has been discussed for some time, it is still an
evolving idea across the entire supply chain. Most perspectives of ex-
ibility view this concept in terms of adjusting volumes in a manufacturing
environment. Consider a denition of exibility from an online business
dictionary: exibility is the ability of a system, such as a manufacturing
process, to cost- eectively vary its output within a certain range and given
time frame.
9
Supply chain exibility involves much more than what this
limited perspective conveys.
What is exibility and why is it valuable? To be exible means to be
adaptable and responsive to change, including changes brought about by
risk events. e opposite of being exible means to be rigid and unable
or resistant to change or modify a course of action. Consider the follow-
ing example of inexibility. In 2013 a derailment of an eastbound pas-
senger train in Connecticut and subsequent collision with a westbound
train severely aected the busiest passenger rail corridor in the United
States.
10
Part of the reason the impact was so severe was that construction
in the area of the accident reduced the number of active tracks from four
to two over a seven- mile stretch. e result was a complete lack of routing
exibility that prohibited the diversion of trains to other tracks. Hundreds
of thousands of commuters were forced to shi from the rails back to the
roads, a part of the country that already experiences trac gridlock.
Flexibility provides choices, and choices directly support greater sup-
ply chain resiliency. Flexible supply chains are able to adapt quickly to
changes or risk events, including disruptions to supply and changes in
demand, while maintaining customer service levels.
11
e key point here
is to be able to respond quickly, sometimes within minutes of an event.
Examples of Flexibility
No single type of exibility exists or applies to all situations. Table12.1
describes various kinds of exibility with ways to promote that exibility.
While this talk about exibility sounds good, where do we see it in the
real world? Following are examples of the value of supply chain exibility.
Energy Flexibility. An increasing number of utilities operate power-
generating facilities that use coal or natural gas as their energy source. As
market prices shi between coal and gas, some utilities take advantage
of these price changes by shiing their fuel source. One observer notes
that “natural gas prices can’t really shoot much more above a certain level
because then utilities will pile back into coal.”
12
Of course, the inverse is true.
Emerging Risk Management Tools, Techniques, and Approaches • 233
TABLE12.1
Supply Chain Flexibility
Type of
Flexibility e ability to… Supply Chain Tactics
Volume
exibility
Adjust order volumes
internally and with
suppliers in response to
changes
• Overtime and weekend production
• Access to temporary labor
• Contract manufacturers and secondary
suppliers
• Safety inventory
Order lead
time
exibility
Have variable rather than
xed lead times with
suppliers as required by
customer demands
• Ask for shorter lead times from suppliers
• Negotiate variable lead time
requirements with suppliers
• Select suppliers that have lead-time
exibility capabilities
Scheduling
exibility
Adjust production and
delivery schedules
internally and with
suppliers
• Real-time data visibility and dynamic
scheduling
• Ask for preferential scheduling
treatment from suppliers
Product
conguration
and variety
exibility
Modify the design of a
base product, including
adding new varieties or
features
• Develop platform products that allow
re-congurability and modication
Physical
exibility
Increase square footage or
layout through physical
infrastructure changes
• Use modular facilities that can be
modied for new uses
• Build in future expansion and
re-congurability capabilities during
facility design
Capacity
exibility
Modify the internal and
external capacity levels of
supply chain members
• Recongure work cells to shi
according to product mix requirements
• Use overtime and weekend production
• Approve secondary supply sources and
contract manufacturers
• Reserve capacity slots with suppliers
Design
exibility
Modify product designs
quickly
• Computer aided product designs
• Virtual simulation and testing
• Use standard components wherever
possible
Internal
routing
exibility
Alter how a product ows
through a facility
• General rather than specialized
workers and equipment
• Preapproved alternate routing
Logistics
exibility
Reroute or adjust
movement through
logistical networks and
modes of transportation
• Approved secondary carriers
• Multiple port options
• Multiple modal choices
• Control material title of goods
continued
234 • Supply Chain Risk Management: An Emerging Discipline
Coal prices cannot rise too high because utilities will shi to gas. Utilities
are such large consumers of both raw materials that industry observers
expect coal and natural gas prices to move inversely rather than in unison
as utilities adjust their usage in response to market prices. Energy exibil-
ity provides a natural hedge against the nancial risk of rising energy costs.
We expect shis in market share between coal and natural gas to continue
as utilities adjust their raw material usage based on prices.
Capacity Flexibility. Companies are increasingly pursuing longer- term
contracts with suppliers that feature reserved capacity that is not commit-
ted to any particular product. As demand becomes better known, these
capacity slots are replaced with actual orders. is approach provides
greater exibility, shorter lead times, assurance of supply, and of course
reduced supply chain risk. e medium to longer- term forecasts that are
used to reserve capacity slots usually involve an aggregate number rather
than specic products.
Physical Flexibility. When a leading medical technology company that
designs and manufactures orthopedic products planned its Mahwah, New
Jersey, facility, it did so with exibility as a primary objective. e facility
TABLE12.1 (continued)
Supply Chain Flexibility
Type of
Flexibility e ability to… Supply Chain Tactics
Source/
location
exibility
Shi production from one
internal or external
supplier or site to
another supplier or site
• Multiple internal production sites
• Multiple qualied suppliers
• Suppliers with multiple production
sites
Workforce
exibility
Assign and reassign
workers as needed
• Simplify labor work rules and job
classications
• Gain access to temporary labor
Energy
exibility
Shi seamlessly between
energy sources
• Buy ex-fuel vehicles
• Consider energy exibility when
specifying new equipment and facilities
Material
exibility
Substitute one component,
material, or material
grade for another
• Preapprove material substitutes during
product design
• Avoid custom designed materials
Supply chain
exibility
Shi between supply
chains to accommodate
dierent products and
customer channels
• Create dierent supply chains for
dierent production strategies and
market segments
Emerging Risk Management Tools, Techniques, and Approaches • 235
includes work cells that can easily be recongured from one product line
to another, a capability that allows the company to better match demand
and supply across its many products. Furthermore, the building was con-
structed so it could be physically expanded if more square footage was
required. is compares with facilities that are xed due to proximity to
other structures, roads, railroad tracks, etc.
Design Flexibility. Common wisdom would say that it is not feasi-
ble to build servers in the United States. Someone should have told that
to SeaMicro (now part of AMD), a company located in Santa Clara,
California. e company uses a contract manufacturer located one mile
away to build a radically dierent kind of server. SeaMicro says that man-
ufacturing locally has helped it compete successfully against much larger
rivals. e company’s engineers are constantly experimenting with new
components in a bid to reduce energy consumption and quicken the per-
formance of their servers. Engineers take their changes a mile down the
road to the contract manufacturer and test them in new systems almost
immediately. Design exibility, which SeaMicro calls “lean engineering,”
saves weeks and even months compared with using contract manufactur-
ers located in China or Taiwan.
13
Product Conguration Flexibility. Over the last decade John Deere has
been tearing up more than dirt. e company has also been tearing up
sales as growth continues from overseas operations. While a number of
factors contribute to this growth, something we cannot ignore is the com-
pany’s ability to oer an unbelievable variety of product combinations.
Farm equipment is not a product like aircra, that is generally standard-
ized country to country. In a recent year, Deere built almost 8,000 varia-
tions of its popular 8R tractor line. Product design exibility allows Deere
to serve the needs of diverse farm markets using a single product platform.
Lead Time Flexibility. An example of a company that owes a large part
of its success to exibility is the Spanish retailer Zara, a company that is
synonymous with fast fashion. Since its inception, the company’s founder
has insisted the retailer always follow two basic rules—store inventory
must be replenished twice a week and stores must receive their orders
within 48 hours.
14
is allows Zara to be responsive exibly to demand
shis and customer preferences, particularly as the retailer expands glob-
ally. We are also seeing a resurgence of small apparel manufacturers in
the United States as customers place orders (usually smaller orders) with
suppliers that can respond in days or weeks rather than months.
15
And,
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