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Just in Case

Just in Case

In the wake of the terrorist attacks Gartner is warning enterprises to prepare for supply chain disruptions and potential shortages of material, to re-evaluate just-in-time strategies and consider increasing the inventory of critical items. Steenstrup says many customers are now looking to have vendor-managed inventory (VMI), paid for by the supplier, as close as possible to their factories just in case a shut-down happens again.

In his keynote address, Gartner senior vice president Bob Hayward told Gartner Symposium/ITxpo 2001 attendees that the fallout will compel a fundamental change in supply chain strategy: from companies wringing out the last ounce of inefficiency in the supply chain to ensuring continued operations in the event of major outages and disruptions. Companies will have to choose between accepting the risk of their just-in-time processes ceasing to function (Hayward doubts many will find this option acceptable) or choosing an alternative strategy that will entail increased costs. Instead of extending the supply chain out in search of ever more efficiency and low cost, most companies opt for the latter more expensive approach. "The result will be fewer but more critical partners and suppliers, with deeper and deeper links and longer-term contracts, but ironically, at a higher cost," he says.

The decision on which way to go is likely to be highly individualistic. Ford Motor Company is reportedly modifying its lean-inventory business model to protect against possible parts shortages that might again shut down production without warning. The company, which has long used an inventory model in which it stores little inventory, is now stockpiling engines and other critical parts at some US plants.

On the other hand Toyota did not shut down plants in the immediate wake of September 11. A spokesman says the company will continue to operate its manufacturing operations on a just-in-time delivery system, a key component of the Toyota Production System. But he says like other businesses, Toyota will continue to assess risk and undertake contingency planning in cooperation with business partners and supplier companies to minimise potential disruption to its business.

While Hayward believes companies will adopt a "the fewer the better" attitude when it comes to their supply chains, other analysts say many companies will develop multiple sourcing strategies designed to provide greater resilience and adaptability in the event of disruption and failure. Steenstrup says such strategies not only let companies obtain materials from multiple locations but also build supply chains that in a physical or business sense are resilient and adaptable in case of interruption and failure. "If one part fails they can source parts or have transportation through other means," he says.

But Steenstrup warns multiple sourcing means building a little more expense into the process, so one of the downsides is that the ultimate nirvana of truly efficient lean manufacturing with no wastage in the process has moved a bit further out of reach. And multiple sourcing will only be a viable strategy where organisations have a clear notion of who their supply chain partners are and have worked with them for a period of time.

In spite of those drawbacks, it's a strategy that helped insulate agricultural and industrial chemicals supplier Incitec against the worst impacts of the terrorist attacks. Incitec supplies nitrogen-based chemicals into agriculture and industry, manufacturing ammonia and derivatives in Brisbane and Newcastle and importing about half the products it sells from overseas manufacturers, particularly in the Arab Gulf. Logistics manager John Warnock says the company saw a tightening of supply along with a price rise for nitrogen fertilisers post September 11, but that the effect on the company was minimal because of its global sourcing strategy.

"We do rely on buying half the product we sell from overseas, so we are quite vulnerable to the overseas markets, but overall we haven't seen as much impact as one would have thought. It has made us reassess where our sourcing points are and what the risks are. We'll try and spread that risk around," Warnock says. "We always try and keep a number of suppliers accredited so we know they are able to supply product to our specification. We will be making sure we continue to have a number of different supply points."

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More about AMR ResearchAustralian Graduate School of ManagementAustralian Trade Commission (Austrade)Dawson ConsultingE*TradeFord MotorGartnerGartner ResearchHolden- General MotorsIncitecMotorolaToyota Motor Corp AustTransportationXerox

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