This continues our series of commentaries outlining our 2012 Predictions for Global Supply Chains. These predictions are provided in the spirit of advising supply chain organizations in setting management agenda for the year ahead, and in helping our readers and clients to prepare their supply chain management teams in establishing programs, initiatives and educational agendas for the New Year.
Prediction Three: As a result of the major supply chain disruption events that occurred throughout 2011, senior management among global manufacturing firms will call for a re-visit of supply chain component and finished goods outsourcing strategies, weighing overall risk as well as low cost parameters.
During the last three years of our Predictions series, we included a prediction for increased incidents of major supply chain risk and disruption. In 2011, we predicted that increased incidents of major supply chain disruption would bring senior executive attention and leadership to the area of supply chain risk identification and proactive risk mitigation planning. That will accelerate in 2012. Two of the most devastating incidents that impacted global supply chains, namely the severe earthquake and tsunami in northern Japan in March and the monsoon-related floods that occurred in Thailand have provided the wake-up call that the zeal of lower cost outsourcing has exposed certain industry supply chains to significant business risk. Manufacturers and retailers residing in automotive, semiconductor, consumer electronics and other industries discovered the real sourcing vulnerabilities they had. Global manufacturers such as Honda, Toyota, Nidec, Sony, Texas Instruments, Western Digital and others saw their supply chain operations disrupted for months, with considerable financial and business consequences.
Many supply chain teams can well imagine the consequences if the magnitude of the Japan disaster, which was severe, had occurred in China. Ratings firm AM Best in a recent webcast noted that 60 percent of China’s industrial economy is currently located on its east coast, which also has a high vulnerability to flooding, and questioned whether risk management concerning the world’s largest manufacturing region is advanced enough to protect its manufacturers and their respective supply chains. While manufacturing may be shifting more towards China’s interior regions, vulnerabilities still exist.
We predict that in 2012, a senior management motivation to concerted action finally will occur, and this will be the start of a changed global sourcing landscape in the coming years. Attention will turn towards increased scenario planning, particularly for low-probability but high impact events along with the need to have more built-in redundancies across the global supply chain.
In prior years, sourcing strategies were motivated either by a quest for lowest cost provider or having some presence within emerging growth markets, allowing perceived access to a huge growing market such as China. The third dimension will be global wide risk, namely to balance sourcing in that no specific region adds significantly to overall capacity, process, or inventory exposure risk.
A further compelling motivation for the C-Suite will be the future cost of casualty and business continuity insurance. As an example, Munich Re has recently indicated that 80 percent of all global insurance losses in the first nine months of 2011, nearly $259 billion, were caused by a series of natural disasters occurring in the Asia-Pacific region. That figure obviously does not include losses resulting from the October-November floods in Thailand. Preliminary estimates point to loses, as a result of the Thai floods, estimated to be in the range of an additional $10-$11 billion.
There are now increasing indications that the major global insurers and reinsurers will re-evaluate weather and natural disaster risk profiles in certain geographic regions that have had recent multiple occurrences or have the potential for increased natural disaster risk. Insurers will begin to request more detailed information related to to global supply chain sourcing presence. Depending on that re-assessment, the criteria for global sourcing of components, contract manufacturing and finished goods may well have to include weighting for increased casualty and business continuity costs associated to a specific geographic region, particularly coastal regions of Asia Pacific.
This concludes Part Three of our Supply Chain Matters 2012 Predictions. In Part Four, we will explore our prediction that three specific industries will undergo significant supply chain challenges in the coming year.
In the meantime, readers are encouraged to share observations and added predictions from your industry and functional lenses.
© 2011 The Ferrari Consulting and Research Group LLC and the Supply Chain Matters, All rights reserved.