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Establishing a more appropriate balance between cost and risk is the surest way for a company to create a truly resilient business, capable of managing and mitigating the impact of inevitable events.
The increased frequency of natural disasters has turned supply chain risk into a headline-making issue. “The Great Hard Drive Shortage of 2011” is one of the most memorable and widely covered recent supply chain disasters. Catastrophic flooding in Thailand brought the country’s manufacturing sector to its knees. Because of widespread flooding in one manufacturing “cluster,” hard drive suppliers for the world’s leading computer companies (including Intel, Dell and Apple) were knocked out, resulting in millions of dollars in losses.
Even manufacturers whose facilities were spared by the flooding and remained fully operational were not immune to production delays. Manufacturers like Samsung struggled to get key hard drive parts from their suppliers and were unable to meet demand. Thailand—the world’s second-largest manufacturer of hard drives—produces 40% of the industry’s supply.
Disruptions in the global supply chain due to extreme weather events have exposed the vulnerabilities embedded in the system. Companies and their suppliers have taken on more and more avoidable risk, as a by-product of cutting costs. The cumulative effects of layered avoidable risk has infected the entire supply chain system, threatening industries and economies. The preservation of the physical infrastructure—and its impact on the viability of the global supply chain—can indeed be managed, but it is often an afterthought. All too often, business decision-makers underestimate their companies’ vulnerabilities while overestimating their level of natural disaster preparedness.