The massive supply chain disruptions caused by the Japan earthquake and tsunami show that companies must reconfigure supply chains to respond faster to natural or man-made crises, according to John Shook, chairman and CEO of the nonprofit Lean Enterprise Institute (LEI).
Shook made his observations during a supply chain panel discussion at the Rebuilding Japan Conference organized by Bloomberg Link, a unit of business information giant Bloomberg, LP, on June 7, 2011, at the Japan Society in New York City.
“Maybe the one good that can come out of the disaster in northeast Japan, will be rethinking global supply chains,” Shook said.
Lean Supply Chains Needed
He noted that supply chains became increasingly complex as companies outsourced production and then logistics. As a result, companies generally don’t know who supplies their suppliers, making risk assessment much more difficult.
“There really is this ignorance of who are the suppliers of my suppliers,” said panelist Michael Smitka, professor of economics, Williams School of Commerce, Washington and Lee University.
In addition, outsourcing focused on getting the lowest price rather than assessing the total cost of fulfillment that includes assessing the combined impact of lead times, inventories, service levels, political and monetary stability, and other factors, Shook noted.
He said reconfiguring fulfillment streams so suppliers and customer companies could respond quickly and flexibly to natural or man-made disasters was a superior strategy than stuffing supply chains with inventory just in case problems occurred.
“You don’t try to buffer against a 100-year catastrophe with inventory,” said Shook, who as the senior American manager at the Toyota Supplier Support Center in Lexington, KY, helped the carmaker develop suppliers using its lean manufacturing and management system.
Panelist George Stratts, president and CEO, Chartis Global Marine and Energy, recommended that companies work to integrate logistics and risk management to better understand their exposure to threats.
Shook predicted the disaster will lead to some reversal of outsourcing as companies vertically integrate by bringing operations in-house from suppliers. The key is for management to decide what critical technologies to bring in-house.
For instance, panelist David Schwartz, senior vice president, Risk Management, YKK Corporation of America, noted that his company designs and manufactures critical capital equipment in-house. YKK also develops suppliers in each region where it operates.
Shook, who was the first American kacho (manager) hired at Toyota’s Japan headquarters, continues to travel to Japan regularly. He said some companies are considering leaving the devastated Tohuko region, but most, such as Toyota, will remain.
“Where do you go, Tuscaloosa, Joplin? Something can happen anywhere,” Shook said.
Supply Chain “Madness”
Shook, who writes an eletter on lean management issues, called for using the crisis “to signal an end to 20 years of madness in sourcing strategies. “Single sourcing is dangerous,” in an April eletter “Any Color You Want Except Tuxedo Black.”
“And 100 sources all competing for the next contract based on piece price is also dangerous, in a different way,” he wrote. “When that single source is continents away from production facilities, the danger is magnified. A new sourcing model is needed. The wisdom of ‘dual supplier’ strategies of many lean thinking supply chain managers is clear – avoid both single source and ‘numerous source’ situations.”
Shook advocated using a “dual sourcing” strategy for first and second tier suppliers. This avoids risk if one supplier facility goes down while competition is encouraged between the two suppliers. He also called for companies to produce and engineer products close to markets where they sell.
Other speakers at the conference included Ambassador Shigeyuki Hiroki, Consul-General of Japan, New York; J. Kyle Bass, managing partner, Hayman Capital Management; Naoyuki Shinohara, deputy managing director, International Monetary Fund; and Patrick Moore, chair and chief scientist, Greenspirit Strategies Ltd., a founding member of Greenpeace and author of Confessions of a Greenpeace Dropout. Supply chain panelists were interviewed by Michael McKee, economics editor, Bloomberg Television.
While at Toyota for 11 years, Shook helped the automaker transfer its production and management systems to North America and around the world. Since then he has written or co-authored several important lean management books for LEI, including the Learning to See workbook that established value-stream mapping as the tool used around the world for identifying and eliminating sources of nonvalue-adding activities and for system redesign; Managing to Learn that described for the first time the dynamics of lean management and leadership and how they are supported by the A3 management process; Kaizen Express, a practical guide to the fundamental elements of the Toyota Production System (TPS); and he helped translate into English The Birth of Lean, a compilation of first-person accounts by the Toyota executives who created TPS.
Lean Enterprise Institute, Inc. was founded in 1997 by management expert James P. Womack, Ph.D., as a nonprofit research, education, publishing, and conference company with a mission to advance lean thinking around the world. We teach courses, hold management seminars, write and publish books and workbooks, and organize public and private conferences. We use the surplus revenues from these activities to conduct research projects and support other lean initiatives such as the Lean Education Academic Network, the Lean Global Network and the Healthcare Value Leaders Network.