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OM in the News: When Supply Chains Break

December 20, 2011

The new Fortune (Dec.26,2011) article “When Supply Chains Break”  (pp.29-32) ends with the following line:  “The real cost advantage may not go to the manufacturer with the nimblest supply chain but to the company with the most robust one”.  The opening line is:  “Manufacturers have spent years building low-cost global supply chains. Natural disasters are showing just how fragile those networks really are”. Sure enough, with hundreds of Hondas in the flooded plant in Thailand just floating in 15 feet of water, it is surreal to think of how we teach the lean supply chain concept.

Invented by Toyota, and perfected in the era of globalization, lean supply chains completely decentralized manufacturing. Manufacturers developed a network of suppliers whose components arrived at assembly plants at the moment they were needed. There was  no pesky inventory to manage, suppliers kept costs down by locating near cheap labor, and consumers enjoyed lower prices.

But the tsunami, earthquake, and flooding in the past year (costing  a total of  $240 billion in Japan and Thailand) have resulted in economic disruptions felt well beyond Asia. Seagate’s CEO predicts its shipments of hard drives (it has 2 plants in Thailand) won’t be normal until 2013. While the computer industry needs 175 million hard drives a year, suppliers can now put out only 125 million, a shortfall of 29%. Apple and HP have already told investors that their earnings will suffer from the floods.

It is not surprising then that manufacturers are starting to rethink their global infrastructures. “The question is”, says one industry expert, ” has the quest for lowest-cost production and hyper-lean supply chains overridden and exposed vulnerability to significant business risk?” For Seagate and many others, the answer is a resounding “yes”. Carlos Ghosn, Nissan’s CEO, said just last month: “”There is going to be another crisis”.

Discussion questions:

1. What should manufacturers do to prepare for the next crisis?

2. What other firms have been impacted, and how, by these disasters?

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