The supply chain disruption stories resulting from the disaster in Japan are reaching a ridiculous level. As much respect as I have for Ford and the way they have managed the business through the economy of the last few years, I have to scratch my head at the news of their restricting color choices the dealers can offer because they sourced some of their paint in Japan. Paint! Ford plants in Michigan, Ohio, Illinois, Kentucky and Minnesota can't make vehicles in "Tuxedo Black". Ford bought black paint from a source over 6,000 miles away, rather than from a US source, for reasons that cannot possibly make sense.
Step 1 in minimizing supply chain risk is the avoidance of sheer stupidity. When Ford's marketing people said customers would salivate over Tuxedo Black only available from Japan, more than they would over 'patent leather black' from Cleveland or 'midnight black' from Topeka, that should have been a Three Stooges moment. The purchasing boss should have taken the marketing guy and the accountant who cranked out the numbers justifying the recommendation by an ear and clunked their heads together, sending them packing back to their cubicles.
The supply chain risk wizards, by and large, have one solution to the question of how best to minimize the possibility of running out of stuff like Tuxedo Black paint – inventory. Their answer is for the auto industry to revert back to the days of high overheads excess inventory drives, and poor quality excess inventory creates. They see the manufacturing world in a rather simple minded way: A choice between old school low risk massive inventory, or high risk lean.
Let me help the supply chain risk community by explaining the math:
To keep things simple, let's assume there is a 99% probability of things going OK in China – no revolutions, strikes, meteors sailing into the supplier factory, etc… Let's also assume a 99% probability that things will go swimmingly in Mexico; and a 99% probability that no disruptions will occur in India; and a 99% probability the Canadians won't get fed up with excessive beer taxes and take to the streets with pitchforks; and finally a 99% probability that Detroit will sail through a year without UAW strikes, blizzards or rampant arson.
If the car company were to buy some components from each of those places, their probability of going through the year without supply chain disruption would be 95.1%. That is calculated as .99 X .99 X .99 X .99 X .99 = .95099. On the other hand, if they were to buy everything in the same region in which they assemble – Detroit, for instance – the risk = 99%.
Supply chain management is not like investment portfolio management where you spread things around to minimize risk. Spreading things around actually maximizes risk. Fewer regions equals lower risk.
Buying in the same region in which you assemble is the lowest supply chain risk. More important, there is some risk that your plant will be shut down by a tsunami, beer-deprived Canadians or meteor strikes. When that happens, the fact that your suppliers are also affected really doesn't matter, does it? Regional sourcing actually creates near zero supply chain risk from outside forces. Buying in the same region also has the benefits of better logistics and least environmental impact.
The objection to regional manufacturing is typically cost. Stuff from Asia, India or Mexico is cheaper, so they say (or in Toyota's case, local stuff lacks the necessary Japanese mojo even if it is cost effective). You might want to remember that the cost figures behind this argument are the same numbers that drove Ford to Japan for black paint.
There you have it – the keys to minimizing supply chain risk: (1) Don't be stupid; and (2) put your eggs in the fewest baskets – ideally one.