High-profile recalls prompt a hard look at supply chain risk management tactics

When an earthquake badly damaged the main production plant of Japanese piston ring manufacturer Rikon Corp.—a supplier to all eight of Japan's automakers—suspended production caused widespread customer disruption. Just days later, El Segundo, Calif.-based Mattel was hit by the first of several product recalls involving lead paint. Millions of toys were affected.

These two examples indicate that “Companies' risk management offices traditionally look at market risks and financial risks,” says Harjot Sachdeva, a director with i2 Technologies. “but leading-edge companies must also look at supply chain risk as well.”

Dell and Samsung are two companies that i2 works with to do just that. Specific i2 functionality of relevance when seeking to minimize supply chain risk includes i2's Supply Chain Strategist and Demand Management tools, which enable “what-if?” simulations for observing the impact of changes in inventory, supplier location, transport mode, and other factors. Ultimately, says Sachdeva, “It comes down to understanding and exploiting the trade-offs between inventory and risk.”

Prompted by these and other high-profile stories, manufacturers are taking a long, hard look at their supply chains—and not always liking what they see. While the automotive and contract electronics manufacturing industries are generally ahead of the curve, says Stephen Freshwater, a supply chain VP with New York-based Capgemini, others are playing catch-up.

Freshwater advises looking at total acquisition cost, or total landed cost, as opposed to the factory gate price. A number of risks are directly linked to the factors that make up total acquisition cost—such as cross-border shipping, additional inventory, and long lead times. “By the time you've plugged the full costs of a purchase into the equation, the Far East isn't always such an attractive option,” he says.

Jim Thomas, a supply director at Newport, Wales-based CEM Axiom Manufacturing Services, an international contract electronics manufacturer, stresses the importance of designing redundancy into supply chains wherever possible.

“Use standard, widely available commodity items wherever possible, dual source them, and have alternate sources of supply pre-qualified so that you can switch to them if there's a problem,” he recommends. “You have to think in terms of actively designing a robust supply chain—not just hoping for one.”