Dollars (Not Just Sense) to the Supply Risk Challenge — Quantifying the Impact in Financial Terms

Over on Supply Chain Matters, Bob Ferrari recently penned an excellent piece summarizing how Japanese automakers are beginning to financially quantify the effect of the tsunami/earthquake on their supply chains. The early results are staggering. Toyota's quarterly profit was down 77% and "the financial media is declaring that Toyota will most likely lose its stature as the world's largest automaker." The one event is estimated to cost Toyota from a direct losses perspective "110 billion yen ($1.35 billion)." Bob further notes that Toyota is not expected to resume "full domestic production" until later in Q4 at the earliest. Honda is not necessarily in any better shape, having been "forced to shut down all production in Japan from March 14 to April 10, incurring a production loss of 58,500 cars." It is now running at only 50% capacity pending further reviews this summer.

It might be easy for an outsider with little knowledge of extended global supply chains to look at this situation and suggest that the billions of dollars of supply disruption are limited to an island country in an earthquake prone part of the world. But such a statement is completely incorrect, as Japan also has many smaller suppliers (and large) producing lower-tier supply chain parts, components and semi-finished materials (and in some cases raw materials) used in export markets across the world. Spend Matters believes that the global cost of supply disruptions, stock-outs and other direct items related to the disaster are likely to exceed $10 billion by the time all costs are added up. It's likely the actual number could dwarf this conservative estimate.

While many procurement executives are already using the Japanese tragedy as a rallying cry to build support for supply chain risk investments, until companies create an operational culture of resiliency that permeates the thinking of workers, managers and executives alike, it's likely that future events such as this will have similar costs. Fortunately, though, by looking at the hard-dollar numbers reported by the Japanese automakers, it should be that much easier for procurement and supply chain executives to gain support for business cases and investment to put in place not only the right tools and enabling content to help manage and mitigate risk, but also the cultural changes and education necessary to change buying culture. Just as strategic sourcing transformed how many of us think about a standardized negotiation process -- from up-front spend and market analysis through to contract award and implementation -- so to will events like the tragedy in Japan change how we consider and structure risk and our toleration for it, rather than just our ability to react after the fact or just before an incident occurs.

Jason Busch

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