The Crisis in Japan & the need for Contingency Plans

On the morning drive yesterday, NPR had a report on supply chain challenges posed by the earthquake, tsunami, and nuclear crisis in Japan.  The report centered on one company Ford Motor Company. They are having trouble sourcing certain paint colors because the pigments are sourced from Japan:

Ford has halted new orders for trucks, SUVs and cars that come in tuxedo black. Ford told dealers that it will continue making the models, but it’s cut back on production of cars and trucks in that color. Production of certain red vehicles will also be reduced.

Luckily, its only paint. They can still make cars and trucks but will only have to limit the offerings of certain colors until alternative sources can be developed.  Perhaps, if the sourcing of the particular Tuxedo Black materials cannot be secured, the automaker may have to settle for a different shade of black.

What if the component was more unique and applied to every vehicle in a particular nameplate?  What if it were something that could not be easily resourced without either moving production or necessitating new tools? What if it were something like fuel injectors or engines? What would you do?

Waiting until a crisis hits and then scurrying around like crazy trying to solve serious disruptions is what statisticians and forecasters call random shocks. Japan has certainly experienced not one but three chatostrophic random shocks in succession.

Though we all know that we should have contingency plans just for such circumstances, the probabilities of these events happening are extremely low. Thus it is hard to get teams motivated to take time from their busy schedules to develop contingency plans.

The worse part is that it is not easy to make meaningful and actionable contingency plans. Most companies have spent lots of time and energy making their supply chains lean and as efficient as possible. Part of being lean and efficient is the concept of sole sourcing. It is more efficient to have one solid supplier with which all of ones volume can be leveraged. Any good contingency plan would involve having alternate qualified sources for goods and materials. If you have a plant, a good contingency plan would have to address bringing production up quickly should the plant be disabled.

With supply from Japan being severely distrupted, contingency planning is on the minds of many business leaders. What should  be done? Should we go through a futile Y2K like exercises? Certainly not. The likelihood of those plans being effective were as low as a catastrophe occurring that would necessitate dusting off such plans.

We recommend the following:

• Management teams should discuss and determine their materials and suppliers critical to the business


• Purchasing and manufacturing teams should then assign risks High, Medium, and Low, similar to the classification done in a Failure Mode & Effects Analysis, to these materials and suppliers in terms of:
  
  
  
  • Importance to the business
  
  
  • Risk of disruption
  
  
  
  


• They should discuss what they would and could do should the source of the High-High materials be disrupted or if the High-High suppliers were to go out of business or not be able to produce.
  
  
  
  • What actions, at what costs, can be taken immediately?
  
  
  • What is the cost-effectiveness of qualifying a second source now?  
  
  
  • Are there design alternatives to employ less critical components such as stock items or commodities?
  
  
  • What actions should be put in place at time of a random shock? Note: Organizing a team to scurry around like crazy trying to solve the disruptions in the event of a random shock may sometimes be the only viable plan
  
  
  
  


• The results should be reviewed with the management team.

This exercise should be done at least once a year.  The objective is to make realistic assessments and actionable plans.  If no viable actions can be established, at least everyone knows the risk.

Does your company have contingency plans in place?  Are the plans viable or just plans in place to check the box? Let us know your thoughts.