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CEO Blog: Balancing the Supply Chain After a Disaster: There is No Risk-Free Position

A man and his sister stand before their broken house, destroyed by the tsunami at Rikuzentakata in Iwate prefecture on March 17, 2011.
JIJI Press | AFP | Getty Images
A man and his sister stand before their broken house, destroyed by the tsunami at Rikuzentakata in Iwate prefecture on March 17, 2011.

Following the catastrophic earthquake in Japan on March 11, 2011, affected companies – including my own – have taken a fresh look at the way they manage risk.

And for good cause.

Anyone who has lived through a business roller coaster like the one we’ve experienced over the past five months will never look at business, employees, or how they handle risk quite the same way.

Every company deals with risk. In manufacturing, two of the major risks are inventory risk and disaster risk. If there is too much inventory, resources are wasted, and one risks the products becoming stale or obsolete. Alternatively, if there is a disaster or production interruption that causes an inventory shortage, this puts the ability to continue business in peril.

Manufacturing across the globe has generally focused on managing inventory risk. We are operating in a climate of economic uncertainty, so keeping excess inventory to a minimum has been a prime strategy for maintaining low costs. Unfortunately, while this strategy has been the norm for the last decade, it also carries other risks that have not been fully appreciated and leaves the entire global economy vulnerable.

The reality is that risk exists on both sides of the spectrum. This has never been more glaringly apparent than after the earthquake in Japan. Companies in Japan were forced to deal with significant operational delays and stoppages, drastically affecting output and productivity.

My company, Renesas Electronics, is the world’s largest manufacturer of microcontrollers – small, single-chip computers that control electronic devices – and we supply 40 percent of the automotive industry’s microcontrollers. So, when disaster struck for us, one can imagine the impact on our customers. Many customers, including some in the auto industry, had to halt production while waiting for our parts. And, while we certainly had customers contacting us to ask about production status, we were overwhelmed by their generous offers of support to help us get back online.

Following this devastation, manufacturers have been forced to acknowledge and account for inventory and disaster risk and find a way to manage both. While difficult to strike, I believe that a balance is possible. By working with all parties – suppliers and customers – companies can develop the right equilibrium for each supply chain. This requires much more open communication about supply and demand forecasts, shared costs, and up-front agreements by both parties as to how much increased risk is appropriate for their business. In order to be successful, this discussion has to be deeper and more sophisticated than ever before.

Many executives, including myself, saw substantial pieces of their businesses at risk this year. Going forward, I believe that industry leaders will exhibit a stronger commitment to more balanced risk management so as to maintain business continuity even in the event of a disaster.

Aldous Huxley said, “That men do not learn very much from the lessons of history is the most important lesson of history.” I think we’ve learned this time.

Daniel Mahoney, President and CEO, Renesas Electronics America