Don't break the chain

Fri, Nov 25, 2011, 00:00

Japan’s catastrophic earthquake earlier this year had some far reaching effects. One of the more unexpected ones was a worldwide shortage of a shiny pigment used in automobile paints throughout the world. The pigment – known as Xirallic - was being made at a plant in Onahama owned by a German chemical company called Merck KGaA. This was badly damaged by the disaster.

Many of the world’s leading motor companies, including BMW, Ford, Chrysler, GM, Volkswagen and Toyota, use Xirallic in their metallic paints because of its glistering, shimmering appearance. These manufacturers were forced to limit orders for cars in certain colours as a result. Ford, for example, stopped taking orders for pick-up trucks and other models in a colour it describes as “tuxedo black” and placed restrictions on cars in a series of red shades, while Chrysler limited orders in 10 different colours.

While Henry Ford’s famous adage about customers having any colour they wanted – as long as it was black – did not quite apply on this occasion, customer choice was certainly limited. At a broader level, the paint problems draw attention to the potential threats posed to supply chains, given the increasingly complex nature of manufacturing and higher degrees of customisation. Indeed the motor industry was hit yet again in recent weeks with the floods in Thailand limiting key component supplies, thereby forcing the slowdown of production lines.

Firms need to pay increasing attention to a wide variety of vulnerabilities in their supply chain which range from geopolitical to economic and financial market risk.

“The first thing companies need to do is to get total visibility around their suppliers,” says Alisha Hayden of PricewaterhouseCoopers. “Companies know who their suppliers are but do they know who their supplier’s suppliers are and what their status is in terms of financial health for instance.”

Given that financial reporting is done on an historic basis it pays to have more up-to-date information on a firm rather than dealing with last year’s figures, she notes, so that potential problems can be identified and remedies assessed. “Ireland is an open economy and there isn’t a full appreciation of the threats associated with disruption in the supply chain, whatever the cause may be.”

Very few firms list their suppliers on their risk register. “Companies need to factor in how vulnerable their business model is in the context of their supply chain. They should identify where their Achilles heel is. A risk may be a low risk but it could be one that has a high impact,” Hayden says.

Earthquakes may not be a common occurrence in Ireland, but adverse weather certainly is. Smurfit Kappa Ireland is one local firm that is well aware of this and has built systems to cope with the effects of incidents such as flooding or plant accidents, for example.

A burst pipe at its Belfast plant last month could have halted production. Instead, because of the flexibility built into its plate-making system, it was able to switch production to Lurgan, without significant disruption to its workflow and with no impact on the customer delivery schedule. This is just one example of an approach to manufacturing that anticipates the possibility of problems rather than waiting for the problem to present itself. “We try to ensure that problems are invisible to customers and that they don’t affect our ability to deliver on our promises,” says chief executive John O’Loughlin.

The firm places a high priority on working with customers on their demand planning. As part of a major restructuring of its business since 2007 that has involved reducing headcount by 350, the firm has invested heavily in new machinery and software. It has replaced a variety of dated and difficult-to-maintain legacy systems with enterprise business software that integrates with scheduling software. It has a centralised database model that allows it to manage work from plant to plant and to have a consolidated view of all orders. With more accurate costing information, managers can also adapt quickly to customer demands on margin.

Smurfit Kappa Ireland has also addressed the supply side of its operations by having a consignment stock agreement in place with suppliers. This means that it has stocks of raw material such as paper on site, well before they are needed, without affecting its working capital as invoicing only completes shortly before the items are required. Such agreements suit suppliers as well as they allow for larger scale supply, O’Loughlin notes. Moreover, they mitigate against potential disasters such as industrial accidents at a supplier plant or other factors that could delay supply.

Integrated manufacturing sites driven by enterprise-level software and inventory cushions – such as the ones described above – are excellent examples of the type of contingency planning that can avoid supply chain problems, says PwC’s Hayden. “Flexibility in the organisation of the manufacturing process is the key to ensuring continuity and avoiding costly disruption,” she says.

Dual-sourcing agreements and agreed alternative arrangements with suppliers in the event of unforeseen circumstances are other tools that can be employed. Understanding customers’ needs fully can also be very important, she adds. For example, a customer may not require all of an order at once and knowing that this is the case can result in more efficient scheduling decisions.