CASE STUDY CONCEPT: Managing Supply Chain Risk through Resiliency and Supplier Selection.
Global supply chains can suddenly present you with unexpected challenges. They are more unpredictable than local or regional supply chains because there are so many more players involved. And because they are exposed to natural as well as human-caused events happening in different parts of the globe.
This case study explores what can happen to global supply chains when an unexpected event occurs. It picks up where the “Fantastic Corporation – Business Expansion” case study ends. It uses the expanded supply chain model you created while working on that case study and takes it forward. There is also an option for using this case study if you did not work through the previous Business Expansion case.
Fantastic Corporation designs and makes a fantastic new home entertainment center that performs to demanding specifications, and delivers impressive results. While you are focused on supporting Fantastic Corp’s expansion into Europe (or just trying to keep up with demand in North America), something unexpected happens on the other side of the world. An earthquake and tsunami strikes suddenly, and production of a critical component is halted because of damage done to the factory of one of your key suppliers in Japan.
Keep the Company Running and Find a New Supplier for a Critical Part
The Fukushima Factory is now out of commission. It is expected to take up to eight months to repair damage and resume production. You have some inventory of this critical part already in your supply chain at various locations. You need to make best use of the inventory you have available, and find a new supplier as quickly as you can. Otherwise a grim scenario will play out for your company. For lack of this part, production will come to a halt. For lack of production, stores will run out of inventory. And for lack of inventory, customers will be turned away. Sales will plummet. If Fantastic can’t meet customer demand, then a competitor will.
You need to find a new supplier for this critical component — the Fantastic CPU. When you do find a new supplier, you need to reconfigure your supply chain to incorporate that new supplier and minimize disruptions to the product assembly operation in the Los Angeles factory. As much as possible, you need to avoid reductions in product amounts delivered to stores selling the company’s home entertainment center. That is the only way to keep sales up, and keep competitors from taking away customers that would otherwise buy your product.
This is a case where extra inventory (or planned safety stock) that may have built up in your global supply chain will come in handy. Inventory often builds up in spite of people’s best efforts. You may not have exactly planned to let that happen but sometimes things work out, and because of this extra inventory you may have a bit more time to do what needs to be done to handle this disruption.
NOTE: If you created a supply chain model during your work on the Business Expansion case for Fantastic Corp, then use that model as you work through this case study. If you did not work on the Business Expansion case, or do not have a supply chain model that runs for 30 days, there is a supply chain model in the library that you can use. It is labeled “Fantastic Corp Ver3 30-Day“. It does not have the expansion needed to support Europe, but it will run the existing business in North America for 33 days (the supply chain model is shown below).
[ Instructors, students and professionals can request a free SCM Globe trial demo — NOTE: This is an advanced case. Work through the three online challenges of the beginning case, “Cincinnati Seasonings” before working with this case.]
As you work through this case you will come to appreciate that “extra inventory” and “planned safety stock” are the same thing, but viewed from different perspectives. When conditions are stable and predictable, then it makes sense to reduce extra inventory through use of just-in-time (JIT) product delivery and smaller order sizes. But when conditions suddenly become unstable and unpredictable, then companies need to be prepared for disruptions by maintaining planned safety stocks of critical products. The question is always to determine what are appropriate levels of safety stock. And also to determine which products are most critical and thus needing higher levels of safety stock. Answers to those questions keep changing as the world itself changes.
A process for on-going supply chain risk management using supply chain simulations is presented below. Also presented are thoughts and comments on this case from a professional supply chain risk manager.
Business Continuity and Supply Chain Risk Management
Risk assessment and contingency planning are a big part of managing any global supply chain. Unexpected things happen. Risk assessment and contingency planning are not just once-in-a-while events; they need to be part of a continuous process that involves multiple stakeholders. That on-going process is illustrated in the diagram below.
Read more about this process in the online guide section “Balancing Supply Chain Risk and Performance”
This risk assessment and contingency planning process is explored in more detail in an interesting article at SupplyChainDrive.com – “Supply chain resilience plans start with mapping — but don’t wait for disruption to test them”
Insights from a Professional Risk Manager
We asked a professional risk manager who plans and monitors global supply chains for his thoughts on the risk factors in this case and how to handle them. His name is Adrian Clements, at the time he shared these observations with us he was Director of Global Risk Management at ArcelorMittal, a global steel manufacturing company.
[Instructors – see pages 22 – 24 of the SCM Globe Instructor Manual (Ver 2.7.9.H – September 2021) for additional discussion of business risk factors related to supply chains like this one.]
Adrain observed that the key to the whole thing is that supply chain managers give accurate overviews of costs and risks to senior executives so good decisions can be made. His thoughts on this case are split into Comments and Risk Insights shown below:
Comments:
- In the first paragraph of the Case study introduction you state that production comes to a halt. Later you state that there is stock to prevent production stoppage. It might be better to highlight the first statement as a worse case as my first thought was why don’t they have safety buffer stock. The calculation of normal buffer stock and safety reorder points should take this into consideration when you understand the risks that you are taking.
- [NOTE: Adrian’s comment is right on point. And yet calculation of normal buffer stock and safety reorder points depend on estimates of what the risks are. If risks are estimated as low then buffer and safety stocks are also set low because safety stock represents overhead and money tied up in inventory. There is always pressure to reduce safety stock. Other times stock builds up in unplanned places in a supply chain due to shipping delays and delivery schedules.]
- Fantastic Corporation is “turning customers away”. When Nintendo had the same issue they used media and marketing to promote a “better product” and “it’s taking longer than expected to improve” etc. They should not turn customers away!
- You will never get customers back. Once you change to Xbox you don’t spend the money and come back to PS4 for example. You only buy one home entertainment system.
- The case states, “You need to find a new supplier for this critical component” . Why limit the search? Maybe you can find a new supplier for the entire package. Take this as an opportunity and use the marketing department to sell a “new and improved” version etc.
Risk Insights:
- From a natural risk assessment perspective the risks in Malaysia are very similar to those in Japan: Earthquake; Tsunami; Volcano etc. so your natural risk profile has not improved.
- You have additional issues because infrastructure in Malaysia is poor compared to Japan
- Quality control in Malaysia not as good as Japan
- Child labor issues and potential unsafe working conditions exist also
- Foreign exchange (Forex) is an issue because of monetary fluctuation
- Potential tax issues in Singapore may hit your profit line
- Increased transport costs will be incurred
- Increased theft issues arise as small and high value items are perfect theft targets
- Terrorism and outbreaks of infectious diseases are also things to keep in mind
YOUR CHALLENGE — find a new critical part supplier and minimize disruption to business operations
You need to find a new supplier to replace the component part that you can no longer get from the crippled factory in Japan. Your company has decided to look for a new supplier in Malaysia. Malaysia is not as stable a country as Japan, and there are new risks involved in doing business with a supplier in Malaysia. This new supplier may be only an interim supplier while your Japanese supplier makes repairs to their factory, or it may become a long term supplier for your company. You will decide based on the research and simulation results you observe.
Do the best research you can with the time available. Do web searches on key words and phrases; scan the websites and information that comes up. Don’t get lost in the details; look for key facts and insights to help you make decisions as described in the points below:
- First, run the 30-day simulation of the supply chain (either the one you created in the previous case study or the one you loaded from the SCM Globe library). Notice how inventory flows through the supply chain. Click on different facilities in the data displays on the right side of the simulation screen. Watch the Fantastic CPU inventory flow from Fukushima to the warehouse in Tokyo and across the Pacific to the Seattle Factory where it is used in an assembly operation.
- Now set daily production at the Fukushima Factory to zero and remove the vehicle and delivery route that moves the Fantastic CPU product from the factory to the Tokyo warehouse. Then run the simulation and see how long it runs before lack of the Fantastic CPU product causes the simulation to stop. In the real world this would be the amount of time you have to find and incorporate a new supplier into your supply chain before disruptions would start to occur in your manufacturing operations. You may be able to gain a bit more time by making better use of existing supplies.
- Explore ways to make best use of existing supplies of the Fantastic CPU to keep production going as long as possible. If you pulled in all inventory of CPUs spread throughout the supply chain and concentrated that inventory at the facility where it is used, how many days of production can you support?
- Next, research companies in Malaysia that can produce a product like the Fantastic CPU. The powers that be at Fantastic Corp headquarters decided they want to do business with a supplier in Malaysia, so do your best. Search on electronics and computer chip fabrication companies. Here are some websites that list CPU suppliers based in Malaysia (and you can find others):
- https://www.ec21.com/companies/MY/cpu.html
- http://www.computerhardware1.com/cpu-suppliers/malaysia.html
- http://www.ecsm.com.my/
NOTE – When this case study was first written there were several CPU suppliers in Malaysia. But conditions change and companies come and go. You may find there are no CPU suppliers in Malaysia when you do your search. If that is the case, then look for CPU suppliers in surrounding countries. (Instructors can direct students to source the CPU from any other country or region as they wish.) - Available information is sparse. Some of these companies may be little more than mailing addresses or outlet channels for other CPU manufacturers who prefer to remain unnamed for various reasons. Welcome to the world of procurement.
- Look at the websites of these manufacturers and do more research to see what else you can find. Pick one to be the new CPU supplier. Assume the price will be the same as the price from the Fukushima Factory, and assume in the first 30 days they will only be able to provide an amount of product that is 10 percent less than what the Fukushima Factory provided. Consider things such as location of the supplier and any other relevant factors. List your reasons for picking the supplier that you selected.
- Find the location of this new supplier and place its facility on the map. Create a new product (call it “New CPU”) to represent the CPU this supplier will provide; use the same product specifications as those for the CPU from the Fukushima Factory.
- How do you deliver the New CPU from the new supplier to Singapore? Create a new vehicle and delivery route to bring the New CPU to Singapore (use the default vehicle costs or research costs in Malasia if you have time).
- Assume you deliver the CPU from the new supplier to the supplier in Singapore so you can ship both products from the same location. You could ship both products on the same vehicle to the Long Beach factory, but this would involve changing the assembly operation performed at the Seattle Factory or moving that operation entirely to Long Beach. If you don’t want to change the operation in Seattle, you will need to ship the New CPU on a different vehicle directly to Seattle or Tokyo – consider the trade offs. What are the transportation and operating costs associated with keeping the assembly operation unchanged in Seattle versus closing the Seattle facility and moving all operations to Long Beach?
- The CPU from the new supplier and the motherboard made in Singapore are both low weight and low volume items that have a high value so both can be shipped by air freight if need be. Maybe you want the supplier in Singapore to combine the New CPU with the motherboard to create a component that you send to Seattle or Long Beach or another facility. List a couple of product assembly options and note how they would affect the supply chain design.
- Now review all the facilities where the CPU is stored or used and change over from the old Fantastic CPU to the New CPU. Do the same for the routes that transport this CPU and substitute the New CPU for the old one.
- Make needed adjustments so this new supply chain will run for 30 days. What adjustments do you make, and what kind of ripple effects do you see because of these adjustments to add this new supplier?
- NOTE – Default vehicle operating costs are from 2014 – you can accept default costs, or do research on current transportation costs to get better numbers for vehicle costs per kilometer. Find 3PL and transportation companies and find current costs for shipping by ocean, air, rail and truck. Default rent costs at facilities are set higher than what they would normally be. You can accept the default, or use a commercial real-estate website such as CityFeet – www.cityfeet.com – to research current rental rates in different cities in North America, and for cities in other parts of the world start with KnightFrank – www.knightfrank.com.
Model some of the supply chain options described above and run simulations as shown below. See what happens. Refine your supply chain design based on what the simulations show you. Here are some things to think about as you run the simulations:
- How can you best use existing inventory in the supply chain to support operations at the factory in Los Angeles and sales at the stores?
- How well can you integrate a new supplier into the supply chain and what quantities of the new CPU will you need from them to maintain operations at the factory?
- The new supplier can only supply you with 90% of the amount you used to get from the factory in Japan, so what is the best way to blend existing inventory with new supplier inventory to meet demand at the factory?
- Do you recommend using this new supplier as a long-term supplier or just as an interim supplier? Why?
For ideas and techniques you will need to work on this case see “Tips for Building Supply Chain Models” . This is a good case study to incorporate more accurate techniques for modeling transportation costs and delivery schedules; they are explained in this tutorial. Scroll down to the “Vehicles” section and read about adjusting speed and cost of ocean shipping containers. There are useful ideas to be found in the section “Reducing Inventory and Operating Costs”
When you have questions about how to work with this case, the answer is always to ask yourself, “What would I do if this were the real world and I was the person in charge?” Model and simulate different possible ideas. Make plausible assumptions, then add/change/delete products, facilities, vehicles and routes as called for to model your ideas. Simulations show how well they work. Pick the best ones.
REPORTING TEMPLATE for use with this case study: Import your simulation data into the template and create monthly profit & loss reports as well as generate key performance indicators. The reporting template is set up for the S&J Trading Company, but look at how the reports read the simulation data and you will see how to change the spreadsheet to add more products and facilities to accommodate this case study – Download copy of Multi-Product P&L Reporting Template here
[If you are using SCM Globe Professional version, these reports can be generated automatically by clicking on the “Generate P&L Report” button in the Simulate Screen]
CREATE A SHORT EXECUTIVE BRIEFING (a 3 – 5 page report or a short deck of presentation slides). Use screenshots and data produced by simulations to illustrate your main objectives and your recommendations for how to best achieve those objectives.
To share your changes and improvements to this model (json file) with other SCM Globe users see “Download and Share Supply Chain Models”
SAVE BACKUP COPIES of your supply chain model from time to time as you make changes. There is no “undo”, but if a change doesn’t work out, you can restore from a saved copy. And sometimes supply chain model files (json files) become damaged and no longer work, so you want backup copies of your supply chain to restore from when that happens.
Register on SCM Globe to gain access to this and all other case studies. Click the blue “Register” button on the Log In page (app.scmglobe.com) and buy a subscription (if you haven’t already) using a credit card or PayPal account. Then go to the SCM Globe library and click the “Import” button next to this case study. Scan the “Getting Started” section (if you haven’t already), and you are ready to go.