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When the eruption of Iceland's Eyjafjallajokull volcano sent a stream of ash into the sky, news headlines focused mostly on European airspace being shuttered and millions of passengers being stranded. The broader long-term questions for business are now taking shape: How will an erupting volcano—or any major disruption, natural or otherwise—affect global commerce, and what can be done to mitigate both risk and economic disaster in the future?
Although losses from the volcanic eruption are still being tallied, the number is certain to add up to billions of dollars; some worry that the damage to fragile national economies could reignite recession. Businesses hit hardest have been those with extended supply chains and short-life-cycle products as well as those producing high-cost, lightweight goods such as pharmaceuticals and electronics. While only 2 percent of freight is shipped by air, that 2 percent represents 35 percent of the actual value of goods being shipped. The potential impact of major turmoil in air freight is obvious.
Two trends that have evolved over the past 20 years that are compounding the potential for big supply-chain disruption following a disaster are just-in-time inventory and low-cost country sourcing and offshoring.
Just-in-time inventory enables companies to move products quickly, making their supply chains more effective and reducing the amount of working capital tied up in inventory. However, a just-in-time supply chain is also more vulnerable to short-term disruptions such as those created by a natural disaster.
Additional vulnerability to business disruption has been created by companies making the switch from local suppliers to lower-cost suppliers thousands of miles away. Similarly, many companies have relocated manufacturing to locations with lower wage rates, stretching supply lines and opening them up to possible transportation disruptions. Their willingness to increase transportation costs and to source and manufacture in faraway places in order to reduce supply and manufacturing overhead carries some added risk.
While it's nearly impossible to predict the next major business disruption—whether the culprit is a natural disaster, a terrorist attack, or labor unrest—it's more critical than ever that companies examine their exposure to all risks and build dynamic supply chains with the flexibility that will make them resilient in the aftermath of disruption.
An excellent example of that kind of flexibility can be seen in the way TNT, the Dutch mail and express group (and client of Accenture), responded to the closure of European airspace following the eruption in Iceland. With established and tested contingency plans already in place, TNT found itself and its customers relatively unaffected.
For intercontinental shipments, TNT rapidly switched from the use of its air hub in Liege, Belgium to an air gateway in Madrid. Shipments that would ordinarily be air-freighted across Europe were diverted onto TNT's existing European Road Network. Centralized management of the network and a common systems platform enabled TNT to reroute freight relatively easily. Meanwhile, the company made communications with its customers a top priority by providing information through the media, its website, and its customer account teams.
Flexibility can be enhanced on several fronts:
Sourcing: Although many companies have reduced costs significantly by sole-sourcing and buying from low-cost country suppliers, a more streamlined approach that makes use of a diversified supplier strategy may offer the flexibility required to find alternatives quickly in an emergency, mitigating risk.
Manufacturing: A flexible manufacturing strategy creates options for building critical products in multiple locations, with fast changeover capabilities that allow production to react to sudden shifts in supply and demand.
Product design: The best strategies for a more flexible supply chain start at the design stage. Products designed with manufacturing flexibility in mind reduce complexity and leverage common platforms and parts, which in turn reduces exposure to supply outages.
Logistics: A global transportation network optimized both for cost and risk considers multiple routes to markets and contingency shipping plans.
While management must never lose sight of the need to hold down costs and deliver products and services in the most effective way, it must balance that need against the importance of keeping the supply chain running smoothly at all times. In a hyperconnected global business environment, an interruption anywhere can lead to disruption everywhere.