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Risky Business (Part 3): A Supply Chain Continuity Case Study
Muda. It’s the Japanese word for waste and the enemy in modern supply chain management and manufacturing. Since the 1980s, lean thinking has revolutionized the way businesses operate by seeking to eliminate muda and free capital held in wasteful assets—that is, assets that do not add value to the overall process (e.g. excess inventory or underutilized equipment). Lean thinking is important and helps businesses to improve their processes and their bottom lines. It does however beg one key question that risk managers and business continuity professionals must ask: “how lean is too lean?” Wantonly cutting out all perceived muda to save money can actually have the opposite effect down the road. Organizations with global supply chains inherit significant risk due to the potential impact associated with a supply chain disruption. In some cases, a disruption could threaten an organization’s ability to continue business or require large amounts of capital to recover. Organizations must fully examine their processes and supply chains to identify risk and make informed decisions on how lean is too lean.
This perspective—the third in the Risky Business Series—leverages a case study of the recent west coast dock worker strike to demonstrate the inherit risk of a supply chain that is too lean due to a virtual monopoly. This article also revisits evaluation and mitigation strategies from the first two Risky Business perspectives that organizations can use to reduce risk to an acceptable level.
CASE STUDY: WEST COAST MONOPOLY
Nearly half of all United States maritime trade flows through west coast ports.1 These 29 ports—even when considered in their multiplicity—represent a single point of failure to downstream organizations. The west coast ports operate as a de facto monopoly because control is shared by the International Longshore and Warehouse Union (ILWU) and the Pacific Maritime Association (PMA). Like management and unions in other business sectors, the ILWU and the PMA often disagree over working conditions, pay, benefits, and other issues. Consequently, the west coast ports frequently experience disruption during negotiations as employees strike or employers lock them out, resulting in supply chain disruptions for downstream organizations. On a national level, port shut downs have a dramatic impact on U.S. trade. Current assessments predict that the 2015 shut down will shave 1 percent off total gross domestic product in the United States for the year and created nearly three months in delayed inventory at the port.2
The effects of west coast dock strikes have been far-reaching, businesses all over the country have felt the impact. Following the dock strike in 2002, Ultra-met Carbide Technologies of Urbana, Ohio was forced to diversify its suppliers to include vendors who ship their material through other US ports. According to their President, Brent Sheerer, this diversification strategy helped mitigate the impact of subsequent port closures.3 Elsewhere at Honda facilities in Indiana, Ohio, and even Canada, the 2015 port closure caused delays. Honda’s Midwest regional supplier of auto body frames, KTH Parts Industries, experienced a parts shortage that led to a five-day halt in production at Honda’s aforementioned facilities and an idle workforce of nearly 15,000 employees.3
At this point in time it is clear that strikes will happen regardless of who is at fault (port management or the union). Analysis of the threat of dock strikes should not be political; rather organizations should evaluate labor disputes as a statement of fact. Since the year 2000, there have been three strikes (2002, 2008, and 2015) with another to be reasonably expected in 2020 when the current deal between the two sides expires. When it does happen again, cargo will again be backlogged and stuck in the port of Los Angeles (or elsewhere) instead of being delivered downstream. Given the severe impact of these strikes, and their frequent occurrence, organizations should plan to mitigate this critical threat. The question then becomes, what can be done to prepare?
What to Do
Evaluation of the risk to west coast port operations should not be limited to labor strikes. Additional threats or considerations include earthquakes, typhoons and hurricanes in the Pacific Ocean, and other disruptions to shipping companies (ocean and land). As such, developing strategies to mitigate the risk of a supply-chain disruption should include a holistic analysis of potential downtime impacts, threats, and mitigation options, in addition to addressing specific scenarios such as a port strike or disruption. While it is important to address frequent and recurring threats, only addressing specific scenarios leaves an organization vulnerable to and unprepared for unforeseen events.
The First Step
The first step in developing a mitigation strategy is to determine business requirements. This preparative step (often executed in the form of a business impact analysis) will answer important questions such as:
- What critical products and services would be affected by the actualization of this threat?
- How long can the organization (as well as its customers) be without those products and services before the impact becomes intolerable?
For more information on how a business impact analysis (BIA) and risk assessment can help to mitigate organizational risk and threats, see Part One of the Risky Business Series.
Part Two of the Risky Business Series addressed potential strategies for mitigating overall risk. Strategies should be chosen to mitigate both the impact and likelihood of disruptive incidents (as well as recurring or probable threats that may lead to disruption). Specific to the particular risk of a supply-chain disruption, the threat of another closure due to a strike is real and increases the likelihood of a disruption significantly. Therefore, downstream organizations should implement strategies to mitigate the impact of a disruption, in addition to any “likelihood” strategies that reduce probability of a supply-chain disruption (or strategies that address both!). Below are two plausible strategies that could help organizations prepare for and respond to supply-chain disruptions.
- Route Diversification: While the west coast ports handle the majority of U.S. cargo, there is already a shift taking place away from such a reliance. Given the success that companies like Ultra-met Carbide Technologies had following their implementation of this strategy, many organizations are diversifying their shipping operations. The Journal of Commerce polled 138 shippers in February 2015 and 65 percent responded that they plan to ship less cargo through the west coast ports in the future.4 This strategy requires significant logistical effort and each organization will need to conduct its own set of cost-benefit analyses to determine the viability of this approach.
- Carry Larger Amounts of Inventory: Though contrary to a pure lean perspective, carrying a larger amount of inventory (safety stock) may be the best way to mitigate the impacts of a supply-chain disruption. Having capital sit dormant on a shelf is not ideal, but it is preferable to inventory sitting dormant in a steel container in San Pedro, CA during a strike. Organizations should use the results of their BIA to determine the appropriate levels of safety stock to carry to simultaneously reduce muda but also mitigate the impacts of a disruptive incident. There may also be a balance between holding inventory and using higher cost shipping methods when absolutely necessary (like air).
Specific to the case study and knowing that future disruptions are almost a certainty, supply chain managers and business continuity professionals should evaluate and mitigate the impact that future strikes will have on their organizations. Doing so can help their organizations avoid taking part in the $2 billion of economic impacts, per day, that the U.S. economy suffers during west coast dock strikes.5
Ultimately, each downstream organization should be proactive about dealing with the risks and impacts associated with supply-chain disruptions. Each organization is impacted differently by the variety of risks associated with supply-chains and logistics. Although some organizations may decide to accept the risk and remain lean, business continuity professionals always have a responsibility to analyze risk and present decision-makers with the information required to make an informed decision.
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ISO Technical Specification Release:
On September 16, 2015, The International Organization for Standardization (ISO) published a technical specification (aligned to ISO 22301) addressing the topic of supply chain continuity. You can learn more here:
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