Abstract
This paper examines the system of procurement and supply and the effects natural disasters have on supply chains and buyers. It elaborates on the situations that manufacturers face when encountering natural disasters. Finally it elaborates on possible supply chain strategies that can be employed in order to avoid future problems as a result of natural disasters.
While there are a variety of possible solutions available to prevent interruptions in the supply chain they are not without significant setbacks.
The inherent problem with trying to prevent any and all supply chain interruptions while taking into account the possibility of natural disasters is the fact that there are too many factors at work to actually create a 100% effective plan that can mitigate and all problems. The best possible solution would be diversify the supply chain to such an extent to ensure that production does not stop completely should a supplier be affected by a natural disaster.
Introduction
The concepts of procurement, production and purchase are at the very core of the global economic market, these consist of raw material suppliers, manufacturers and then consumers who help drive the global economy. The fact is, not all companies are able to extract raw materials, convert it and turn it into a product that is commercially viable.
Each type of company specializes in accomplishing a specific type of economic activity, in the case of the manufacturing industry this specialization is divided into three distinct categories namely that of a raw materials supplier, a components manufacturer and a final product maker.
The reasoning behind this separation is based on the fact that it is far more profitable for companies to focus on a specialization that they are good at rather than attempt to diversify into other aspects of the production process. Such a system thus results in a single product being produced as a result of each company’s specialization culminating into the creation of a finished product.
While each individual product has its own unique manufacturing process all of them share the same dependence on the concept of the procurement supply chain where each stage in the process is an integral part in helping the product come together (Shuguang, 2010).
It is due to this that the question of what would happen to the supply chain once an integral link in the process be removed comes to mind as a result of some unforeseen external event (Shuguang, 2010).
One of the inherent problems with doing business in the current global system is the fact that unforeseen circumstances such as natural disasters (i.e. tsunamis, earthquakes, floods etc.) have a distinctly negative effect on the supply chains for most businesses. As such, it is necessary to determine how natural disasters impact supply chains and what processes can be done to prevent the possible collapse of the chain as a result of such unforeseen factors.
Understanding the Effect of Natural Disasters on the Process of Procurement
Production processes are not as robust as most people tend to believe, in fact they are quite vulnerable due to their dependence on a continuous stream of raw materials and components, their labor force and the lastly a constant supply of fuel/energy in order to keep production facilities running (Stecke & Kumar, 2009).
If you take even a single aspect of the operation out of the equation, such as the labor force, raw materials and components or even the fuel/electricity, the entire process quickly breaks down and production grinds to a halt. The inherent problem with natural disasters is the fact that they affect all components of the production process in unique ways and as a result their occurrence is detrimental to the efficient production of various goods (Stecke & Kumar, 2009).
Effect on Supply Lines
When natural disasters happen, the supply of raw materials that goes into the production line stops completely. The reasoning behind this is simple, natural disasters prevent accessibility to various areas due to the destruction of roads, bridges and debris that are a common place occurrence after a natural disaster strikes (Bunkley, 2011).
As such, supply trucks that would normally be able to reach the manufacturing complexes are unable to go through which prevents the delivery of goods (Bunkley, 2011). Raw material suppliers are also reluctant to send supply trucks immediately after a natural disaster has occurred due to the possibility of a recurrence.
Another factor to consider is that raw material supplies do not always come from local suppliers but can also come from international sources. The problem with this is that the various docks and piers designated for the offloading of cargo may have been affected by the natural disaster itself which creates a certain amount of difficulty in terms of getting the raw materials off of a ship and towards a production complex.
The raw material suppliers themselves could have also been affected by the tsunami resulting in their own facilities receiving considerable damage which further complicates their capacity to be able to send raw materials to their various clients (Winslow, 2011).
Effect on Labor
When natural disasters strike their effect on local populations can be devastating with possible casualty rates escalating from hundreds to possibly thousands of individuals. In such cases it is likely that workers from the factory could have been affected by the disaster and as such this directly affects the production capability of the production facility (Financial performance, 2006).
It is unlikely that a factory located near a natural disaster would force their workers to come work in light of the disaster that just occurred. Without workers production screeches to a halt until either it has been determined that it is safe for production to continue or new workers are hired to replace those that died.
In such cases where a large percentage of the worker population has died this affects the production capacity of the factory until such a time that a new workforce can be adequately trained to match the capabilities of the old one. This process of transition can take months and as a result greatly reduces production capacity and the quality of finished products.
Effect on Production Capability
The 2011 earthquake and tsunami in Japan has revealed one crucial factor about natural disasters and their effect on production capability and that is the fact that even though a facility is located hundreds of miles away from where the disaster actually occurred there is still the possibility of the disaster affecting the production capability of the factory. This is based off the resulting effect natural disasters have on power grids and power lines (Lohr et al., 2011).
The earthquake, tsunami and the damage to the Fukushima nuclear reactor that followed, impacted factories located as far away as Tokyo which is 135 miles away. These factories had to slash their production capabilities to almost 40% of what they are normally capable of doing due to the periodic power saving measures instituted by electric companies in order to prioritize more “essential” services (Lohr et al., 2011).
As a result, factories located within the Tokyo and the surrounding areas are unable to meet their previous production target which creates problems for buyers who have come to rely on prompt delivery of their needed components (Bunkley, 2011).
Recommendation
Possible Procurement Strategies to Avoid Supply Problems due to Natural Disasters
There is an old saying that states that “you should not put all your eggs in one basket”, what this means for the strategy of procurement in light of the possibility of natural disasters is to diversify sourcing strategies in order to prevent the possibility of being supply blocked (Chopra & Sodhi, 2004).
There are several possible procurement strategies that could be employed in order to diversify supply lines for products however while each method does have its own merit it does also come with several negative aspects that should be taken into account before creating a procurement strategy that centers around them.
The first strategy would be to diversify the supply of integral components through several suppliers in several regions and countries instead of a single main supplier for the component (Perry, 2007). The advantage of this method is that should the area of one supplier be affected by a natural disaster the remaining supply lines would still be viable and could “pick up the slack” so to speak of the lost supply line (Perry, 2007).
One problem with this method is the fact that by separating the amount of components supplied through several companies the company purchasing them actually loses out on potential bulk discount savings that could have come from ordering from a single company.
Another problem to take note of when it comes to supply diversity is the possibility of shifting quality standards when sourcing from different companies from different locations. Companies have their own set of quality standards, business culture and safety regulations that they adhere to depending upon the region in question. For example, companies within China have a much lower degree of corporate social responsibility as compared to companies within Japan, the U.S. and various European countries.
This would result in the components of the same product being invariably better or worse than others. This of course creates a problematic situation for a company’s quality standards since the differences in component quality have to be taken into account during the quality control process.
It is due to situations such as this that most companies prefer to source particular components from a single supplier. Not only does this resolve the issue regarding problems in the quality control process but it makes the production process that much cheaper.
Another possibility that could be taken into consideration is that assuming the quality standards of the suppliers a company is sourcing a single component from are the same, the company could merely source the same component from different locations to avoid interruptions in the supply chain.
The inherent problem with this situation is the differences in cost due to the distance of delivery. If a company were to source products from different suppliers yet all of them are located in the same general area this makes the concept of supply diversity useless since they would all be hit by the same natural disaster.
One method around this would be source products from different regions or better yet different countries (Skoufias, 2003). The advantage of this method is that it would prevent natural disasters from hitting all suppliers at one time. As mentioned earlier, the problem with this is the differences in overall costs in delivery with some locations that are nearer obviously costing less than those that are far away.
In cases such as this companies would then choose to have a majority of their supplied components coming from locations that are nearby thus lowering the cost of transportation (Skoufias, 2003). In this situation it is assumed that all components cost the same and that it is the cost of delivery that causes differences in prices.
The inherent problem with this particular solution lies with the fact that too large of a percentage of component supply is isolated to nearby locations. if such locations were to be hit by a localized natural disaster more components would then have to be shipped from locations farther away which may or may not have the production capacity to meet the company’s needs.
Another approach to the problem comes in the form of simply obtaining suppliers from locations that are not prone to natural disasters thus there would be little risk of disruptions. While this method of procurement is sound there is still a problem as to whether there would actually be a components manufacturer in an area that is not easily affected by natural disasters.
Research into possible areas not directly affected by natural disasters shows that areas located in the Middle East have fewer natural disasters as compared to other locations around the world. Unfortunately their industries are neither agriculturally nor industrially based and as such would prove to be viable locations for sourcing if a company was dealing with petroleum based products. If not, they would not prove to be useful at all.
References
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