April 16, 2012

Asian disasters drive firms to boost safety stock

Japanese earthquake, Thai floods prompt U.S. manufacturers to rethink inventory strategies.

By James A. Cooke

In the aftermath of supply disruptions caused by major natural disasters in Asia last year, high-tech companies and other enterprises making products with long lead times are rethinking their stocking practices, according to a prominent trade lawyer.

"We see a return to companies holding three months' [worth] of inventory [as a hedge against] supply chain disruptions," said Michael L. O'Shaughnessy, an attorney with the firm of Greensfelder, Hemker & Gale PC in Chicago, whose commercial law practice includes negotiating supply agreements for clients.

Many Asian suppliers for U.S. companies suffered disruptions to their manufacturing and distribution operations by the earthquake in Japan and the floods in Thailand. O'Shaughnessy noted that the Thai floods were more disruptive to his clients because Japanese manufacturers rebounded faster from the earthquake than their Thai counterparts did from the flooding.

"The floods in Thailand spooked more people because of the vulnerability it revealed in those plant operations," O'Shaughnessy said in an interview with DC Velocity.

The supply chain disruptions triggered by the twin disasters have forced companies to rethink their lean production and just-in-time delivery strategies of the last 30 years, said O'Shaughnessy. At the same time, businesses making high-value electronic goods need to be cautious about allocating too much product to inventory for fear that frequent upgrades or redesigns will quickly render their existing products obsolete, he warned.

In addition to expanding safety stocks, some of O'Shaughnessy's clients have begun diversifying their supply base. The addition of a second supplier to ensure parts or product supply, however, can raise procurement costs. Not only might a second supplier charge more for its goods, but the buyer now has to devise additional plans for delivery.

The lawyer is advising his manufacturing clients to include a "force majeure" clause in their supplier contracts to have the seller help the buyer find an alternative source of supply if necessary.

One option to mitigating Asian supply chain risks would be "reshoring," or returning production to the United States and closer to the points of consumption. O'Shaughnessy said his clients are weighing that option more seriously. However, most companies will not increase their domestic production footprint if it means giving up the cost advantages they can obtain by sourcing overseas, he said.

About the Author

James A. Cooke
James Cooke is a principal analyst with Nucleus Research in Boston, covering supply chain planning software. He was previously the editor of CSCMP’s Supply Chain Quarterly and a staff writer for DC Velocity.

More articles by James A. Cooke

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