All smoke, no fire

Posted on 8 Sep 2010 by The Manufacturer

Anand Sharma contends the view that global disruptions render lean counter productive

In a less connected world hurricanes, floods and the occasional volcanic eruption did not have the global business impact that they do today. Still, supply chains have a long way to go before they can be considered “too lean.”

Every time there’s a major transportation disruption someone opines that today’s manufacturing companies are too lean, and that just-in-time strategies are backfiring. Supply chains aren’t redundant enough, they say. There’s not enough just-in-case inventory in the pipeline. We should go back to the good old days when manufacturers had warehouses full of stuff sitting around waiting for orders to come in.

The essence of the argument is that sourcing parts and products from all over the world, coupled with just-in-time and an efficiency mentality that ties up as little capital as possible in inventory, has created a situation where any disruption anywhere in the world brings global capitalism to halt. Where’s the evidence? Let’s look at the eruptions of the volcano in Iceland this April and May. Eyjafjallajoekull grounded all European air traffic, passenger and freight, for five days. Combined revenue and passenger compensation losses for the European airlines stand at an estimated $1.7bn. Then there is the lost revenue of businesses that depend directly on air freight, such as the African farmers whose flowers and vegetables rotted because they couldn’t ship their perishable products into Europe. So, without question, the eruption had a huge financial impact on a few industries. But what about the ripple effect into other industries that depend upon efficient and reliable global logistics networks? Taking the heat During the flight shutdown a number of large, publicly traded companies reported volcano-related supply chain disruptions. The second quarter numbers are now in and we can see if those disruptions had any material impact on financial performance.

It was widely reported that the loss of air freight in and out of Europe forced BMW Group to reduce output at three manufacturing plants in Germany and one in the US. Leather seat covers from South Africa and transmissions and other parts from Europe were stuck on the ground.

You might say that’s a supply chain disruption of the first magnitude. But they must have found alternative transportation lanes. BMW’s recent quarterly report covering April and May does not contain one mention of the volcanic eruption. In fact, the company’s revenues increased by 18.3% and vehicle sales climbed 12.5%.

Because air-pressure sensors from Ireland could not be shipped, Nissan Motor Co. had to shut down production lines in Japan. But for its first quarter, ending June 30, 2010, Nissan sold 32% more vehicles compared to the same period in 2009 and net revenue increased 35.3%.

Digging a little deeper, during the months when the ash plume stretched across Europe, Nissan’s production in April increased 57% year-on-year, marking an all-time record for the month. Production in May increased 42% year-on-year, another record breaker. Even in the UK, at the heart of the transportation disruptions, Nissan production volume increased 25% in April over the previous year.

Granted, the previous year was dismal for auto sales but BMW and Nissan are not the only companies that are bouncing back from the global recession despite supply chain disruptions.

Beyond the automotive industry the flight cancellations caused shipment delays for notebook computers for Dell’s European customers. Again, there is no mention of any financial impact in Dell’s quarterly financial report. For the quarter ending April 30, sales increased 18%, gross margin increased 16%, and operating income increased 25%.

Finally, the South Korean electronics and appliance conglomerate Samsung reported that product exports dropped 20% during the flight ban. But Samsung posted a 17% sales increase in its second quarter on strong sales of semiconductors, flat-panel TVs and smart phones.

Despite almost three decades of applying just-intime principles, today’s global supply chains remain loaded with unnecessary inventory buffers and other opportunities for efficiency gains. The market landscape of course is constantly changing, which is why every supply chain that I’ve ever analysed to any depth offered plentiful opportunities to trim millions of dollars of costs, without increasing exposure to risks. In fact, from procurement practices to distribution, network design to how work is managed on the warehouse floor, the potential changes and improvements actually reduce risk exposure.

Major transportation and supply chain disruptions grab headlines and cost billions of dollars, but today’s lean and flexible global supply chains are not the fragile networks that they’re sometimes made out to be. They are, in fact, more robust than they’ve ever been.

Anand Sharma, chairman and CEO, TBM Consulting Group