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Factories Look for Supply Chain Risks in All the Wrong Places

Terri Reeves Thursday, December 19, 2013 Supply Chain Management

Here’s the latest advice for supply-chain managers: Sweat the small stuff.

Manufacturing company executives responsible for parts and supplies tend to worry most about what would happen if deliveries from one of their biggest suppliers were disrupted by a natural disaster or other unforeseen event, says David Simchi-Levi, an engineering professor at the Massachusetts Institute of Technology. An analysis Dr. Simchi-Levi did recently with executives at Ford Motor Co. F-6.29% confounded that notion. It showed that some of the lowest-cost items, from minor suppliers, can cause the biggest and costliest disruptions.

Examples related to making cars include such things as valves (costing a few dollars) or o-rings (costing a few cents). In many cases, he said, companies have alternative suppliers and ample inventories for big-ticket parts but no such backstops for bits and pieces whose absence nevertheless could halt production.

“Risk is hidden in unexpected places,” Dr. Simchi-Levi says.

Manufacturer around the world got a crash course in supply-disruption risks in the wake of Japan’s earthquake and tsunami and the Thai floods in 2011. Those disasters cut off vital parts used globally for such things as cars, construction equipment and electronic devices.

It’s impossible for companies to make regular visits to assess risks at every single supplier, especially those they don’t deal with directly. So Dr. Simchi-Levi and colleagues at MITMITD 0.00% have developed computer models to search for weak points. Those models help find situations in which a company is relying on a single supplier and where inventories are small or capacity insufficient.

Once companies find the tiny suppliers that pose outsize risks, Dr. Simchi-Levi says, they may need to line up alternative suppliers, keep more inventory or redesign products to reduce the risk of disruption. In some cases, he says, the manufacturer may need to give a supplier more business so it can afford to build a second plant in another region, providing a backup plan in case of disaster.

Wall Street Journal 

18 December 2013

By James Hagerty

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