We’ve talked about this before… what happens to supply chain risk when you become very, very lean? In the June 17th issue of The Economist there’s an article entitled "When the Chain Breaks", which is yet another misinterpretation of lean supply chains. Andrew Leonard also discusses it in an article in Salon.
Once again a few classic examples are used to illustrate the supposed dangers of sole-source supply chains… as if that was truly a requirement of lean. A fire at a Philips semiconductor plant in New Mexico creates a global shortage of a key cell phone chip, so Nokia immediately locked up the rest of the world supply leaving Ericsson shut down for months. The Long Beach port strike, the earthquake in Taiwan, 9/11, and the truckers strike in the UK are other examples.
But as usual it confuses risk, lean, flexibility, fragility, and sole sourcing. They are not the same, nor are the mutually exclusive. To be lean you don’t necessarily have to sole source. To mitigate risk you don’t necessarily have to have multiple sources. You can be flexible and sole-sourced. A lean supply chain doesn’t have to be fragile. It all depends on the specific circumstances, and more importantly it depends on what is the best way to maximize value to the customer.
The article briefly touches on this by discussing Toyota in Europe, but it doesn’t grasp the impact and importance of what they do. The company builds over 600,000 cars in Europe each year, and in typical Toyota fashion most of the 200 tier-1 suppliers are located nearby. Toyota emphasizes cooperative communication between all of the suppliers, and this creates substantial sharing of business information. This gives them a heads up to potential supply issues ranging from raw material shortages to supplier bankruptcy, thereby allowing for swift pre-emptive action to prevent supply disruptions.
Likewise Nokia in the original example had contingency plans in place. They were sole-sourced, yet they knew where they could turn to in the event of a critical disruption. When the Long Beach port strike happened, Dell already had plans in place to charter aircraft to deliver parts from Asian suppliers. Whether Dell’s long supply chain that results from chasing cheap parts to Asia is truly lean is another [sad] story, but the point here is that they had a plan.
Contrast that to the adversarial (to put it mildly) nature of the supplier relationships between GM and Ford and their suppliers, which are focused almost exclusively on cost reduction. This is yet another reason why GM and Ford will probably never become truly lean. And Ericsson apparently sole-sourced without a supply disruption plan… perhaps a form of looking lean instead of being lean.
The Economist article ends with the suggestion that the limits of globalization may be defined by the management of supply chain risk, with the supposition that the global risk from man-made and natural disasters is increasing, therefore supply chain risk must also be increasing. An interesting idea, but I don’t buy the underlying premise. A global supply chain is not necessarily more risky than a domestic one (here’s one reason), supply chain risk has been managed since the days of when the ancient Greeks had to decide how much treasure to load on a ship vs how much they could afford if it sank, and leading-edge technology almost always initally comes from a single source.
There has always been risk, especially with sole-sourcing, but success is based on how that risk is managed… while being focused on maximizing value to the customer.