Risk form an integral part of engaging in any business or organization structure. Its increase in the recent past has seriously impacted the companies’ operations and ability to meet their targets. In most cases, organizations have come up with risk management strategies in response to known-unknown risks due to their nature of controllability. However, the uncertainty in occurrence of unknown-unknown risks has proved to be a damaging factor to supply chains of various organizations. These occurrences are attributed to natural disasters such as earthquakes and hurricanes. They have adversely disrupted the medium through which products and services are distributed. It is with such concerns that there has been an agitation for the reorganization of supply chain and risk management strategies in order to effectively respond to sudden crisis.
This write-up discusses an example on how an unknown-unknown risk has proved damaging to a supply chain. It explains specifically how invest in redundancy, increase velocity in sensing and responding, as well as how creation of an adaptive supply chain community has helped mitigate this risk.
According to Levi (2010), an effective supply chain should systematically address both extreme risks such as natural disasters and operational risks which have consistently increased the level of risks and volatility being faced by various enterprises. He notes that the evident unrest in Middle East, inflation rate in China, volcano-related interference with transportation system in Europe, and global oil volatility require effective risk management systems for the profitability and existence of efficient supply chain. Additionally, Levi points out that associated operational errors such as forecasts errors, transportation breakdowns, and sourcing challenges have also called for the need by the companies to plan and execute effective supply chain that adequately respond to such challenges.
While some methods such as characterizing forecast errors in order to predict likelihood of breakdowns in supply chain performance have been engaged to identify the delivery of delays in known-unknown risks, they have not effectively addressed unknown-unknown risks. As Levi (2009) defines it, unknown-unknown risk is a type of risk which is difficult to quantify the likelihood of its occurrence. Contrary to known-unknown risks, unknown-unknown risks are less controllable due to their nature, thus, posing challenges to the various measures of mitigating risks related to supply chain.
A good example of unknown risk that can results into unknown consequences which can adversely affect the supply chain of associated organizations is an earthquake. This was evident on March 11, 2010 when the biggest earthquake stroke Japan thereby damaging an number of global supply chains related to this country. According to Behdani (2011), an earthquake of 9.0 magnitudes whose epicenter was 120 km coast of Sendai in the northern Japan known for agricultural and industrial activities triggered extremely destructive tsunami waves that were estimated to be 10 meters high swamping everything on their way.
Additionally, Behdani (2011) points out that the Japanese earthquake resulted into interruption of power system, destruction of infrastructure, and depositing of debris that ultimately closed the roads thereby hindering transport system and, therefore, the supply chains associated with a number of Japanese companies. As he alludes, most of the production companies located at the north and east of Japan evacuated their workers and closed their plants due to fear of the aftershock. For instance, Renesas, the world largest producer of microcontrollers, suffered heavily from the earthquake which resulted into the shutting down of its six facilities (Behdani, 2011).
The damage of infrastructure such as roads, bridges and landslides caused by the earthquake destroyed heavily supply chains associated with this company. This is because it affected the accessibility of port, railway lines, and roads through which its products could be transported both to the local and international markets. For example, the suspension of the operations of its local based market like Sony based in Japan adversely affected the supply chain. This means that the impact of Japanese earthquake was not only felt locally, but internationally due to the decline of auto parts and electronics from Japan in the international market.
How to Mitigate the Risk
According to Levi (2010), investing in capacity and sourcing redundancy would create a resilient supply chain effective enough to mitigate the risk caused by earthquake through careful analysis of supply chain trade-offs. He notes that building capacity and sourcing redundancy could enable the organization to embrace flexibility and work towards the same goals as its partners thereby reducing costs and managing risks. He points out that investing in redundancy could have allowed Renesas organization to create flexible supply chains coupled with dual sourcing and redundant manufacturing capacity in its offshore countries. In doing so, the company would be flexible thereby leading to minimal cost of movement of products to other regions. This would have helped the company solve such supply chain problems as those related to transport caused by the irruptions of earthquakes.
On the other hand, by increasing the velocity in sensing and responding to earthquake disaster, the company could have been able to timely and adequately resolve the unexpected supply problems. Pirama (2009) notes that sensing and responding speed enables companies to design flexible supply chain. It could have, thus, countered the resulting changes in supply chain from the effect of earthquake. This would have involved a change in product design to source components from alternative suppliers that would ensure the continuity of supply chain even after devastating impacts of earthquakes.
Moreover, the company could have created an adaptive supply chain community to help it ensure all the required chain elements inhibiting same culture work towards same objectives and benefits. Pirama (2009) notes that adaptive community of supply chain would better respond effectively to sudden crisis such as earthquake. For instance, the creation of adaptive supply chain by Toyota Blueprints of valves that are distributed among Toyota’s supplier’s engineers from Aisin is meant to create a community of supply chain as a recovery effort of the company from 1997 fire incident that stopped Aisin’s main factory from manufacturing and delivering of P-valves. Therefore, creating adaptive supply chain would have ensured that the organization’s essential operations and products delivery is continued even with the occurrence of the natural disaster.
Unknown-unknown risks, thus, pose great challenges to supply chains. The effects of such risks are normally worsened by the inability of the companies to timely identify their occurrences. This has made it difficult to control and manage the associated risks thereby leading to disruption of supply chain. There is, thus, the need for organizations to invest in redundancy, increase their velocity in sensing and responding to unexpected disasters, and create an adaptive supply chain community. Such measures would help in countering the related unknown risks for the continuity and prosperity of supply chain. If companies in Japan can effectively adopt such strategies, in future, they would be able to respond effectively to related supply chain problems caused by such natural disasters as earthquakes.