Risk: Be Flexible

Aug. 25, 2006
Weathering crisis situations depends on supply chain flexibility.

The resiliency of supply chains has been tested mightily in the past several years by major disruptions including natural disasters, terrorist attacks, and wars. During such events, some manufacturers have been able to continue operations with minimal impact on their supply chain processes while other companies have experienced delays or complete shutdowns.

In July, a group of supply chain experts from the Massachusetts Institute of Technology's Lean Aerospace Initiative met to discuss strategies that the aerospace industry can take to mitigate disruptions at the supplier level during crisis situations or major fluctuations in demand. Companies that have successfully reduced the impact of unexpected events have done so using several methods. One common but costly approach taken by some manufacturers is to create or increase safety stock, according to Yossi Sheffi, an MIT Sloan School of Management and School of

Engineering professor who spoke at the supply chain forum at MIT on July 19.

Safety stock may be cost efficient for companies that supply materials for a customer that is willing to manage and absorb the cost of excess inventory, but for most manufacturers keeping stock redundancies is expensive, says Sheffi, author of "The Resilient Enterprise: Overcoming Vulnerability for Competitive Advantage" (2005, The MIT Press).

That means manufacturers must look for ways to build more flexibility into their supply chains. Sheffi pointed to Santa Clara, Calif.-based semiconductor chipmaker Intel Corp. as an example of a flexible manufacturing operation. In the mid-1980s, Intel introduced its "copy exactly" strategy of creating identical fabrication plants. So in the event of a disaster, wafer production can be completed at any plant worldwide. This happened several years ago during the SARS scare when Intel was forced to shut down an Indonesia plant but was able to move production to another facility, notes Sheffi.

The "copy exactly" model also helped grow Intel's revenue by 300% from 1985 to 1995 while decreasing the number of factory workers by 30%, according to company data.

Other ways to incorporate flexibility into supply chains include cross training of employees, empowering front-line employees to act during crisis situations, moving from sequential processes to concurrent processes and postponing value-added steps, Sheffi says. Postponement was a strategy undertaken by Palo Alto, Calif.-based Hewlett-Packard Co. when the company began shipping generic printers without certain components, such as power supplies and user manuals, to its distribution center in Holland where they were configured for each European country once local demand was determined. This helped the company reduce oversupplies and shortages for its European markets. "Of course, it helps them also with disruptions," Sheffi says. "For example when there's a strike in France, you don't get stuck with a lot of French printers. You can move them around."

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