Get Ready For The Next SARS

Although severe acute respiratory syndrome (SARS), a virus that came out of Asia eight months ago, has not been the threat to manufacturing supply chains once feared, now is not the time for U.S. manufacturing executives to let their guards down. The fact is SARS did take a toll on U.S. manufacturers, with, for example, both Motorola Inc. and Texas Instruments Inc. lowering their second-quarter 2003 sales and earnings-per-share projections. What's more, serious and unexpected threats to supply chains are bound to occur in the future. Emphasizes New York-based consultant John Fontana, a principal at Tigris Consulting Corp., "Companies absolutely must understand the key choke points in their supply chain before disruptions occur." Fontana urges U.S. companies, particularly when they take production offshore to East Asia, to "really aggressively war game" their supply chains, analyzing threats and readying such defenses as back-up production sources in Mexico. Indeed, SARS should serve as "a wake-up call" and get executives thinking about whether in their efforts to cut costs they've emphasized efficiency at the expense of responsiveness in their supply chains, says Jay Swaminathan, an associate professor and area chair for operations, technology and innovation management at the University of North Carolina's Kenan-Flagler Business School in Chapel Hill. For a U.S.-based electronics firm that might mean revisiting its selection of a sole-source supplier in China on cost alone. "Maybe the lesson to be learned is, as Mark Twain said, that when you put all your eggs in one basket [you had better] watch the basket," quips Robert Spekman, a professor at the University of Virginia's Darden Graduate School of Business in Charlottesville. Swaminathan advocates a more active strategy. "A firm has limited control over the events that disrupt a supply chain, but it can control how well a supply chain copes with those disruptions," he stresses. Greater supply-chain responsiveness can come from "quicker access [to] and action on available information, storing buffer inventory to hedge against uncertainties, or diversifying the supply base to include not only low-cost overseas suppliers, but also suppliers who may be able to respond faster to changing needs," Swaminathan states. "I am not saying that for every firm it's going to be optimal to . . . do multiple sourcing, but for some firms it may make sense." Says Plano, Texas-based Don Townsend, vice president in the technology practice of A.T. Kearney Executive Search, "I imagine that there are lots of calculators [being used right now] to figure out the economics of increased buffer stocks of raw materials and components and finished goods." Although cost of production and quality of local work forces will remain major factors in outsourcing decisions, he predicts that stability, reliability and predictability are going to become "much more important" than they were a year ago. One of the criteria that CEOs and COOs will be adding to their investment decision mixes is "how well various parts of the world [are] equipped to deal with crises," Townsend says. In any event, good decisions depend on good information. And in China and southeast Asia, places where government information systems and media tend to be less developed than in the U.S., manufacturers need to develop their own intelligence sources so they're able to make their own judgments about what's going on and how serious are the threats to their supply chains, advises Tokyo-based Kevin Gromley, global leader for Deloitte Consulting's manufacturing practice. In the early days of the SARS scare "there was a lack of good information . . . on what was happening," he notes. "There is a big price to be paid for every second of delay in supply chains these days," emphasizes Sunder Kekre, professor of operations management and manufacturing at Carnegie Mellon University's Graduate School of Industrial Administration in Pittsburgh. "The earlier you get the [supply-chain] network to respond, the easier it is to manage [the situation]."