Supply Chain Frontiers issue #14. Read all articles in this issue.
Sole-sourcing, or choosing to rely on a small group of core suppliers, offer the benefits of strategic partnerships, but these strategies can also leave companies highly vulnerable in a crisis. Attendees of the 2006 At the Crossroads of Supply Chain and Strategy symposium this April got a taste of the possible consequences.
This year’s Crossroads symposium featured a live simulation of an avian flu outbreak. A fictional company, $6 billion mobile phone manufacturer, Vaxonn Inc., was hit by an outbreak of bird flu in the South China plant of its primary contract manufacturer. The contractor was ramping up production of an important new product, and the outbreak brought operations to a virtual standstill. A panel of executives from Arnold Communications, EMC Corporation and Intel enacted the roles of responders in Vaxonn’s Corporate Emergency Response team, and managed the hypothetical emergency.
As the crisis deepened, Vaxonn’s reliance on the contractor soon became a major issue. The plant in China was quarantined, and restrictions on the movements of its work force caused high absenteeism and low morale, slashing production rates. Since Vaxonn was heavily committed to the company in the run up to a crucial product launch, shifting to another supplier was not easy. As panelist Tony Sundermeier, Intel’s Americas Customer Logistics Manager, pointed out, “it may be cheaper to sole source but it is also more expensive to shut the operation down should you need to.”
The problem became regional in nature as Vaxonn’s problems mounted. Fears that avian flu can survive on plastic surfaces led the US government to impose restrictions on certain imports from China. American transportation workers refused to handle suspect shipments. The severe port congestion and cargo delays in the US that followed cast further doubt on the company’s contract manufacturing operation. Additionally, Vaxonn’s new product became tainted because in the public mind it was associated with avian flu in China. As a result, moving to another supplier in China might not have reassured the company’s customers. Contractors in other parts of the world would have been preferable – assuming Vaxonn had maintained such relationships.
Recent disasters such as Hurricane Katrina may persuade more companies to revisit past decisions to concentrate manufacturing in a single location. The world’s largest consumer packaged goods company Procter & Gamble reviewed the location of its Chantilly coffee plant in New Orleans after Hurricane Katrina disabled the facility last August. A heroic and highly effective response effort enabled P&G to be the first company back in operation after the hurricane.
As Cath Malseed, Coffee Product Supply Director for the Proctor & Gamble Company explained at the Crossroads symposium, the company subsequently carried out a detailed analysis of hurricane-related risks in the region. The result: the plant was more vulnerable than studies had suggested about 50 years ago when the company originally decided to build the plant. However, P&G has made big investments in the facility that produces 50% of its coffee products. Despite the risks, P&G will stay in New Orleans, she said.
Other companies may not be as sanguine at a time when they appear to be more vulnerable than ever to supply chain disruptions.
For more information see the web site for CTL’s 2006 At the Crossroads of Supply Chain and Strategy symposium or contact Jim Rice, Director, MIT Integrated Supply Chain Management Program