While no one can predict natural disasters, companies can develop more dynamic supply chains to mitigate the impact.
Initial reports of minor volcanic eruptions in Iceland showed images of flooded farmlands and washed out roads. In countries thousands of miles away, few people felt much concern. But in April, when a major eruption of the Eyjafjallajökull volcano sent a giant plume of ash into the sky, that quickly changed. British airspace shut down within 24 hours. A major part of European airspace was closed a day later. The world watched as air travel chaos unfolded.
The scientific community's warnings that eruptions might continue proved true, causing recurring problems in European airspace. While that volcano appears to be cooling down, a second one is heating up. Nearby Katla may soon erupt to cause greater damage than Eyjafjallajokull. Will that happen? No one can say for sure. But one thing is clear — the tremendous impact on air flights carries with it important lessons.
The Impact on Commerce
With the grounding of more than 60,000 flights in the first week, stories of stranded vacationers and business travelers grabbed headlines in the early days of the volcano. As people began making their way home, stories of how the event affected the business community began to emerge — from rose farms in Kenya, to auto assembly plants in the United States, to manufacturers around the world that rely on emergency spare parts for equipment. The worst hit were those with extended supply chains, short lifecycle products or high-cost, lightweight goods such as electronics and pharmaceuticals. While air cargo may represent only a fraction of the total bulk of all cargo, it accounts for as much as 30% by value, according to the International Air Cargo Association.
In the short term, many companies scrambled to find ways to move goods as cargo flights were grounded. Road, rail and ocean freight companies saw a surge in activity. For some, it was too late. Produce and fresh flowers, for example, have a short shelf life and had to be destroyed by the ton. Countries are only beginning to add up the costs of manufacturing disruptions, stockouts and spoiled goods to estimate the extent of the economic impact. For many, it will certainly reach into the billions of dollars. With many economies navigating a fragile recovery, could this be enough to tip them back into recession?
Compounding the Impacts
Two of the biggest trends in manufacturing and supply trends that have reshaped supply chain strategies over the past two decades are compounding the resulting problems from disrupted flights:
Just-in-time inventory. Greater supply chain transparency and efficiency has allowed companies to significantly reduce their inventories. Most have adopted just-in-time techniques to accelerate product movement and free up working capital. However, just-in-time supply chains were more vulnerable to the short-term disruptions caused by the volcano's airborne ash.
Low-cost country sourcing. Companies have taken advantage of global markets for low-cost labor by replacing local suppliers with suppliers in low-cost countries, many of them thousands of miles away. Similarly, companies have relocated manufacturing to places with lower wage rates, trading higher transportation costs for lower production costs. These longer supply lines and transit times leave companies vulnerable to transportation disruptions.
A Dynamic Supply Chain at Work
Prepared with established and tested contingency plans, the Dutch mail and express group TNT found itself — and its customers — relatively unaffected by the air space closures when the Iceland volcano erupted. For intercontinental shipments, TNT rapidly switched from the use of its air hub in Liege, Belgium, to an air gateway in Madrid. Shipments ordinarily air freighted across Europe were diverted onto TNT's existing European Road Network. Centralized management of the network and a common systems platform enabled TNT to re-route freight relatively easily.
Rather than wait for customers to call with complaints, the company used a proactive approach. Messages began flowing at once to customers via the media, its website and its customer account teams.
Lessons for the Longer Term
Of course, no one can predict when a natural disaster will strike, or even the global impact of something as seemingly localized as a volcano eruption in Iceland. The amount of time that scientists are able to forewarn of an impending natural disaster may improve incrementally, but the real lesson in this crisis will be to develop more dynamic supply chains that can help mitigate the impact.
Dynamic supply chains are shaped by examining the exposure to all risks, identifying vulnerabilities and then building in flexibility. New capabilities may be needed in several areas to create a more dynamic supply chain:
Using low-cost country suppliers and sole-sourcing are great strategies for reducing direct and indirect costs, but they need to be balanced to create flexibility. A more streamlined process for bringing new suppliers on board allows companies to quickly find and use new sources of commodity goods in an emergency. And for critical materials, a diversified supplier strategy may offer the flexibility needed to mitigate risk.
Offshore production has significantly reduced the cost of goods for companies, but it also leaves them vulnerable to governmental policy changes, labor issues and other risks, as well as transportation disruptions. A flexible manufacturing strategy has options for building critical products in multiple locations, with fast changeover capabilities in place to allow production to react to sudden shifts in supply and demand.
The best strategies for a more flexible supply chain start at the design stage. Products designed with manufacturing flexibility in mind reduce complexity and leverage common platforms and parts, which in turn reduce exposure to supply outages.
A global transportation network optimized both for cost and risk considers multiple routes to markets and contingency shipping plans.
High Performance from Uncertainty
It's impossible to predict the next natural disaster, political turmoil, terrorist attack, labor unrest, or other event that might cause havoc with supply chains. Without that ability to accurately predict when and where the next major event will occur — and how it will impact the supply chain — the next best thing is the ability to respond with a dynamic, flexible supply chain. Those companies with adaptability built into their supply chains will have the capabilities in place to weather a broad range of supply disruptions that may seem as far-fetched as the minor rumblings of a distant volcano.
Mark Pearson is managing director of the global Accenture Supply Chain Management practice. Bill Read is managing director of that practice in North America.