Supply chain disruptions due to extreme weather natural disasters such as floods and storms are getting more frequent and more impactful. CPOs can no longer comfort themselves by assuming that natural disasters happen once in decades, and will not have significant impact on their supply chains.
Chennai stopped by extreme rains and floods
Recently, Indian city Chennai witnessed incessant rains during November and December, which led to flooding of areas in and around the city. The city is a major automotive hub, and an important part of domestic and global automotive supply chains. Several international OEMs, tyre manufacturers, and auto component manufacturers are based in the city and use Chennai’s facilities to export cars, tyres and components to international markets.
As the floods intensified on December 2, the city was marooned and its inadequate infrastructure including roads, railways, and airport were rendered useless. Many automobile and auto component manufacturers had no option but to shut down their plants and stop operations, ranging from a few days to more than a week in some cases. Indian industry body Assocham estimates economic losses from these floods to be approximately USD 2.2 billion, and according to some news reports, the entire automotive belt in Chennai will face losses of approximately USD 200 million. One of India’s largest tyre manufacturer JK Tyre has already announced estimated production loss of 700 tonnes. Two wheeler manufacturers Eicher Motors will suffer a production loss of 7,200 units, while TVS Motors faces a sales loss of 15,000 units.
Automotive supply chains feel the ripple effect
Many Chennai-based auto component manufacturers, that supply to OEMs across India and export components globally are also expected to face production and supply losses, resulting in production losses for their OEM clients. Toyota Kirloskar Motor (the Indian subsidiary of Toyota) has around 50 tier I and many tier II suppliers in Chennai, and was forced to announce a one day shut-down on December 6 due to shortage of components expected from Chennai.
We expect many large automobile players would have learnt from the 2011 Japanese earthquake-tsunami disaster, which had a severe impact on global automotive supply chains. Chennai, though not as bad, will still have a deep and long impact on global supply chains. Auto OEM’s typically have a large base of tier one suppliers and most of these suppliers have a n-tier supply chains. The impact of such disruptions is greater in today’s world due to increasing geographic footprints of supply chains and lack of visibility into the n-tier supply chains.
Better supply chain management can help
While eliminating natural disasters is beyond the control of the automobile industry (or any other industry for that matter), we do believe that organisations can adopt supply chain management best practices in order to minimize the risks emanating from supply chain including events such as natural disasters. A chronological flow of steps that can be taken is as follows:
- Enhance visibility into your supply chain: This is the first step that organisations should take, with an objective of identifying suppliers in its extended supply chain (suppliers of suppliers) and determining inter-dependencies within its supply chain. This is important because multiple higher tier suppliers may depend on common lower tier supplier, in which case the lower tier supplier becomes critical to the overall supply chain. Example: A common steel supplier maybe supplying steel to multiple tier one and tier two suppliers.
- Map the key risks areas associated with your n-tier supply chain: Once an organisation gains adequate visibility into its supply chain, it should try to identify common risk areas which should be monitored. These risk areas can be change in commodity prices, macroeconomic indicators in specific countries, geopolitical situation in sensitive countries, extreme weather situations, among others.
- Closely monitor identified risk areas and critical suppliers in your supply chain: The next step is to closely monitor the above identified risk areas and critical suppliers on an on-going basis. By doing this, organisation can spot early warning signals related to any risk emerging in the supply chain, and can take proactive preventive action to minimise its impact.
- Share best practices with your suppliers: Given that lower tier suppliers are normally smaller firms, buying organisations should also seek to engage with them to understand how they plan to deal with potential risk scenarios, and share global best practices to make sure they are well prepared at all times. These best practices could include simple steps like introduction and implementation of a business continuity plan, or strategic moves like diversification of their manufacturing base to hedge against natural disasters or other risks.
The above framework is extremely useful to gather supply chain actionable intelligence and avoid disruptions. It can be customized to each risk source and set of suppliers to spot early warning signals. For example, to guard against natural disasters like the one that hit Chennai, procurement organisations should be aware of the ability of their suppliers to face such adverse situations. An indicative list of questions that purchasing managers should ask their suppliers to judge preparedness (operational as well as financial) are:
- Does the production facility have adequate infrastructure to deal with emergencies and natural disasters? For examples, facilities in areas such as wetlands are prone to flooding, and inadequate infrastructure can maximize damage and limit rescue operations in the event of natural disasters.
- Does your supplier have an emergency preparedness plan to minimize downtime and damage emanating from natural disasters?
- Does your supplier have a well-diversified production / delivery base? If the production base is in a coastal area or a city with high probability of earthquakes or volcanoes, then appropriate safeguards should be built-in before a calamity takes place.
- Does your supplier have a plan in place to manage risks in its extended supply chain? If yes, then what is it?
- Is your supplier insured against damage caused due to natural disasters?
Bottom-line, supply chain managers need to realize that Chennai like disasters are here to stay, and will likely increase in the future, given the global warming situation and changing ecological balance. In such a scenario, secure supply chains can only be built by proactively adopting a risk management framework that maps the entire supply chain, spots risk areas, monitors them regularly, and more importantly, promotes buyer-supplier engagement aimed at minimizing risk and enhancing business continuity.
Ankit Kohli is the Founder of Pure Research Private Limited, a procurement intelligence firm. Ankit and his team work with procurement teams worldwide to create secure and sustainable supply chains, based on actionable research on suppliers and categories.