CIO

Just in Case

The September 11 terrorist attacks shattered more than Americans' sense of security. They also shattered many supply chain managers' devotion to the strategy known as just-in-time inventory, a near-religious belief that parts and products should show up just moments before they're needed so that on-site inventory is near zero.

For a while there it looked like just-in-time supply chains would be the glory of the so-called New Economy. Corporate productivity seemed set to grow unabated, costs to plummet and corporate profits - and hence workers' disposable income - to rise.

All that collapsed along with the Twin Towers of the World Trade Centre on September 11 last year. With aeroplanes grounded and borders clogged, stoppages in the transportation of goods and a lack of supplies forced manufacturers like Ford, General Motors, Xerox and Motorola to temporarily shut down plants within days of the terrorist attacks. It's not that demand had tapered off. It's just that their just-in-time processes, so lauded for their superb efficiency, were suddenly unsuited for world where global transportation had failed its greatest test.

Retailers couldn't get goods and manufacturers couldn't get parts. When it came to the unexpected, the just-in-time emperor proved to have no clothes and that the collaborative marketplace looked like a pipe dream. "The whole mechanisms of these extended collaborative supply chains ground to an immediate halt and it revealed a vulnerability in these virtual enterprises that nobody had really been paying attention to," says Kristian Steenstrup, research director, business applications, Gartner.

Suddenly it became clear that in a globalised world, a major incident in one spot could reverberate around the world. Suddenly everyone realised just how fragile were the extended supply chains enterprises were betting their businesses on. Suddenly companies could see the flaws inherent in external-sourcing strategies built around the cheapest source of components or labour. Suddenly it was obvious that keeping a day's - or less - worth of inventory on hand and filling orders as they came in only made strategic sense in a stable world where peace prevailed and everyone was prepared to play by the rules. In the new world order, where no one could be assumed immune from terrorist attack, inadequate supplies could force manufacturers to shut down assembly lines at a cost of up to $US10,000 a minute.

"Lean only works in a free and open society," businessman Ross Perot Jr told The Dallas Morning News. "In the world of terrorism, ‘just in time' doesn't work. Companies are going to have to have much fatter supply chains."

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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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Professor Edward Anderson of the Australian Graduate School of Management says some organisations will now have greater concerns about the operation of B2B marketplaces, particularly regarding the security capability of other players in the marketplace.

"In certain fields you look to a B2B marketplace to increase your market reach. In other words to allow you to have customers or suppliers that you wouldn't normally reach through everyday business contacts - in particular, customers or suppliers overseas in certain industry sectors. You may now feel there is increased risk in the present environment in dealing with people you're not familiar with, although I don't think those kinds of concerns are going to be a major factor in most companies' thinking about their supply chains."

Consumers also perceive increased risk in dealing with products of uncertain origin. J D Edwards product marketing manager Neil Hawthorne says many organisations that are now rethinking their extended supply chains are concerned about product integrity in the wake of the mail-based anthrax attacks as well as the fear of chemical and biological weapon attacks, which further eroded consumer confidence and heightened the general sense of insecurity.

"I think some of the companies are basically saying: ‘Look, I'm not too sure that we're comfortable with some of these long supply chains and maybe we need to be looking at alternate sourcing, and particularly local sourcing of products and commodities'," Hawthorne says.

Suddenly uneasy about strategies that have sustained them for some time, Hawthorne says many companies are ordering buffer stock and planning growth in wholesale distribution. "If they have got long supply chains then they are certainly thinking of buffer stocks a lot more. One of the trends I'm observing is the idea that wholesale distribution probably isn't so bad anymore. That it's not a bad idea to have someone else carrying some stock in between."

Meanwhile the downturn in the developed worlds' economies has increased the volatility of demand, making it much harder to predict. That not only greatly complicates effective supply chain management, but also makes it more vitally important than ever.

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The fallout from September 11 has hit some industry sectors hard. For instance high-tech electronic companies in North Asia, already feeling the effects of the US recession prior to the suicide attacks, have seen a major contraction of business. But industries typically seen as recession proof, such as the food industry, have also noticed an impact..

Roger Bayliss, Austrade executive general manager for the Middle East and Indian Ocean region, says food security in particular has taken on an extra importance after the anthrax scares, with consumers seeking certainty on the quality and integrity of the food they are purchasing. That need for reassurance has direct implications for Australian business.

"The events that have unfolded since September should be a warning to Australia business to carefully examine their supply chains. Where there is any doubt about the supply chain's integrity, organisations should seek to shorten [the supply chain] as far as possible," Bayliss says. "They must ensure that they're delivering a quality product to the consumer faster and in first-class condition and in a form where the consumer is confident that they're receiving a top quality product that has not gone through an elaborate supply chain."

Philip Cryer, a managing partner of Dawson Consulting, says fear of product tampering will force manufacturers and suppliers to build better product recall mechanisms into their supply chains. He says companies will need to ensure the physical infrastructure can support a very efficient recall of product, in a kind of reverse logistics. "I also think the information flow will be increasingly important. Because one thing that we've learned from September 11 is the need to have the message right to keep consumers or the general public confident about what's going on."

Scott Dawes, director e-business industry strategies at Oracle, agrees with that sentiment. Throughout Europe, North America and Australia, he says customers' largest concerns are around product protection and ability to trace and track product - the "genealogy of product" - in terms of tampering. In the US, federal authorities are beefing up legislative requirements that will force companies to better manage the "traceability" of their product, he adds.

"There's a lot of movement towards what companies will have to do with their supply chain in terms of products they buy, profits they make, how they package products, how they ship them, and how they track all those processes," Dawes says. "Companies will need to keep a much tighter control and data network on what goes in to a product, what was done to it, and where it goes. Then in case of an emergency, they're able to cut the process off as quickly as possible and inform those who may have received the product."

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In the US, people aren't the only ones staying closer to home since September 11, companies are too. Ford reportedly is re-evaluating, case by case, whether to award contracts to US rather than foreign suppliers in the wake of the terrorist attacks. Other companies are following its lead. Australian business must respond accordingly. Austrade's Bayliss says exporters are under pressure to ensure they are providing an on-the-ground service to US customers, as well as shorter supply chains. Steenstrup says Gartner has dramatically altered its expectations for collaborative commerce as US companies move increasingly to deal only with known and trusted trading partners.

"US companies were going to seek new partners and go forth where no businessman has gone before and use the Internet in a way of intergalactic matchmaking of business opportunities.

"Now it's becoming more of a closed shop," he says.

Management Strategies

Redesign the supply chain to balance efficiency with resilience.

Prepare for higher transportation costs and longer delivery times.

Have a worst-case contingency plan for every country in which you do business.

Focus on fewer but more reliable suppliers. Cultivate deeper collaboration with them.

Make near-real-time visibility into the supply chain your top priority for the next 12 months.

Stop any "intergalactic" supply chain projects. Focus on smaller, tactical projects with high returns on investment.

Increase your adoption of supply chain process improvements and technology.

Source: Gartner

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New terms like agility and resilience are entering the manufacturing lexicon post September 11. IT will be crucial to the task of keeping stockpiles to a minimum and maintaining flexibility in meeting changing demand as companies address new supply chain home truths. In the wake of the terrorist attacks some companies found the very technology that let them operate with minimal inventories, particularly the software they use to track supplies, made them more nimble in a crisis. That adaptability will help them continue operating if disruptions like those caused by the September 11 attacks and the anthrax mailings become more common.

Since global leaders declared their campaign against terrorism some organisations have experienced a wartime effect on their business environment, and nowhere more so than in the supply chain. As a result both users and vendors will have to work at making supply chain systems more disaster-ready, Boston-based AMR Research analyst Michael Bittner told US Computerworld. For example, companies should build automated alternative sourcing functions into their systems, he says. Technology that can generate international trade compliance documents is also becoming more critical for users, Bittner adds.

"The value of tapping a single source for strategic supplies will decrease. Enterprises that have to get material from a single source should increase their emphasis on the supplier's capability to recover from a disaster," Gartner analyst Dan Miklovic says.

"Enterprises should value geographic proximity more when they make decisions about which suppliers to use. With multiple sources of supply, enterprises should improve collaborative responses and boost suppliers' transparency. The importance of supply chain execution and visibility applications will increase while that of long-term planning will decrease. With dramatically increased uncertainty, planning for different scenarios should take precedence over optimising production based on stable, consistent operations."

Miklovic says extended supply chains are vulnerable when they are visible, accessible and static. "History shows that in times of war, when manufacturing sites were high-priority targets, countries could maintain or even increase factory production if they could develop a resilient, hidden, and flexible supply and manufacturing strategy.

"When key components must remain visible, enterprises should strive to make them secure and inaccessible. Enterprises should place more value on sources of supply near their production lines. Finally, supply chains need the flexibility of multiple sources and relationships so that production can continue even if a supplier's capacity is disrupted," he says.

Miklovic says stockpiling inventory at various points in the supply and production chains can help an enterprise survive.

Holding a buffer of material at each point in the supply chain, while much less cost-effective, can ensure that production continues. He says should a component [maker] in the supply chain become inoperative, enterprises should have a ready supply of the materials that component maker would normally provide. A collaborative supply chain can maintain the visibility of these stockpiles to the enterprise and even optimise the amount stored, based on production rates and expected time to recover from failures.

However Gartner warns that while stockpiling inventory will fix short-term problems, it could introduce yet another level of complexity and cost. Gartner endorses the use of supply chain planning (SCP) tools to analyse target inventory levels to maximise return on investment and react more nimbly to changes, and says enterprises that have not deployed these tools should look for quick work-a-rounds like tools from business service providers or simple SCP models.

Many companies are turning to high-level modelling tools to help them build adaptive supply chain networks. The goal is to be able to access the right information at the right place at the right time in order to make the real-time decisions that will keep the supply chain alive and flourishing during uncertain times.

"Collaborative supply chain management, strategic partnering, and other relationship-based initiatives such as collaborative planning, forecasting and replenishment (CPFR) will become more crucial to success than we have seen in the past," says Dawn Russell, assistant professor of business logistics in Penn State's Smeal College of Business. "Companies will be compelled to work collaboratively to develop new processes and technologies that penetrate the entire supply network and accommodate the additional constraints on the system."

Kristian Steenstrup, Gartner research director, business applications, says the same high-level modelling tools that can be used to achieve zero inventory of work in progress and just-in-time deliveries can be adjusted and tuned to ensure the availability of reserve and safety stock throughout a supply chain. "A lot of the infrastructure and tools that were being developed, and the skills and tools for supply chain management, are actually very adaptable to the new environment. So organisations are able to be agile and resilient by using the same technologies that they'd already been deploying," he says.

"It does - however - result in increased cost. Also, some manufacturers who are totally geared towards a zero inventory model really don't have the capacity to stockpile goods because they don't have any warehouses. Companies like Dell have got some significant problems because they rely very heavily on zero inventory, just-in-time delivery of components and air transportation. It's more difficult for them to change to a resilient model," he says.