Just-in-time supply chains are vulnerable to disasters like the Icelandic volcano but there are solutions.
Most people running supply chains in Europe will have heard of Eyjafjallajökull, the volcano whose ash shut down much of the continent’s airlines for several days in April. But I wonder how many have heard of Tunguska – and why the two of them provide a sombre warning for anyone running a supply chain.
Tunguska, a remote area in central Siberia, was the site of a meteorite impact which devastated an area of 2,150 square kilometres in 1908. So what’s that got to do with an Icelandic volcano, cancelled flights and the management of supply chains?
Both events are a reminder that we are all, to some extent, at the mercy of forces of nature. And that those forces have the power to wreak more havoc than man – although man, admittedly, makes a pretty fair attempt at equalling them from time to time. Who knows when the next meteorite may strike – or where? Add in earthquakes, tsunamis and major floods and you have quite a potential for disruption on an heroic scale.
What was interesting about the Eyjafjallajökull eruption, with its atmosphere polluting ash, was how quickly some supply chains started to collapse in the absence of air freight. Within two or three days, the price of out-of-season vegetables in some northern European supermarkets was soaring. Flights bringing the veg from the growers in Kenya and elsewhere couldn’t reach Europe.
So the first lesson of this is that just-in-time supply chains are especially vulnerable to this kind of disaster. For years, the received wisdom was that just-in-time was good because it reduced stock levels and took costs out of supply chains. But the eruption revealed the JIT downside.
One of the key problems here is that when just-in-time first became de facto supply chain best practice, most supply chains were much shorter. In most countries, there would be a network of companies using JIT principles and supplying one another – but over relatively short distances. The For years, the received wisdom was that just-in-time was good because it reduced stock levels and took costs out. The eruption revealed the downside.
vulnerabilities in the supply chain were not so much in transporting the goods from one place to another as in manufacturing (or in the case of fruit and vegetables, growing and harvesting).
The emergence of global supply chains during the past 20 years has changed that – and added this critical new vulnerability to JIT. You want French beans from Kenya in April? You’ve got them – as long as a volcano doesn’t erupt in Iceland. It is a blunt reminder of how longer supply chains are vulnerable to external events and, in this case, something happening outside the area in which the supply chain operates.
What I guess this is all leading up to is that it could be a good time for companies to do a new risk assessment on their supply chains – both from suppliers and to customers.
The classic approach, of course, is to assess risk on a three by three grid in which the likelihood of the risk is plotted as low, medium or high on the horizontal axis and the vulnerability of the business up the vertical axis. The key risks which need to be most closely managed are those that fall in the top right hand corner of the plot – where high vulnerability and high likelihood collide.
Useful as this analysis is as a one-off, it doesn’t necessarily stand the test of time. That is because both the vulnerabilities and the likelihoods change. There’s not much likelihood that the supply of French beans will dry up when the farmer producing them is only a motorway away from the supermarket – much more when separated by continents.
So a business which hasn’t updated the risk assessments in its supply chains for some time could be in for a few unpleasant surprises. But there is another interesting lesson from the Eyjafjallajökull eruption. That is that digital communications makes it much easier to carry on with business when any kind of disaster strikes.
This is an especially important lesson for those running supply chains, because the ability to handle the command and control issues is usually central to managing the problems caused by a major disruption. It was fascinating to see how people stranded in far-flung places for days because flights were cancelled were still able to run their businesses from laptops, Blackberries and mobile phones.
So there should be another assessment: whether the communications technology in place at all levels of the supply chain matches what’s needed in order to respond to a major disruption – or any kind of disruption, for that matter.
That, at least, is a positive lesson: when a volcano erupts, it needn’t be ashes to ashes for the supply chain.