Shock waves from China disaster would reach R.I.

COMMAND CHAIN? An FM Global-commissioned study found respondents felt that increasing alternative sourcing was the best way to mitigate supply-chain disruption in China.
COURTESY FM GLOBAL COMMAND CHAIN? An FM Global-commissioned study found respondents felt that increasing alternative sourcing was the best way to mitigate supply-chain disruption in China.

“The No. 1 killer of businesses is complacency.”
That’s the final sentence and essential conclusion in a special report that FM Global commissioned to study what would happen if international supply chains are disrupted by a natural disaster in China, similar to the Japanese tsunami.
What would happen is that a lot of supply chains would be broken. Complacency then could kill any business that did not plan – well in advance – to have new supply sources or alternative arrangements ready at a moment’s notice, so the chain of inventory could be restored with little delay.
Steve Zenofsky, assistant vice president and public relations manager for FM Global, told Providence Business News recently that his firm commissioned the study to help its customers, the public and businesses in general realize what a disaster it would be if China were hit as hard as Japan was last year by a catastrophe such as a tsunami or earthquake.
Some estimates say damage from the Japan tsunami and earthquake was as high as $300 billion worldwide, FM Global said in a Dec. 5 news release, and no one knows yet how much devastation the recent severe flooding in Thailand will cause to the global economy.
“The Japan earthquake and tsunami of March 2011 was a close call and a call to action for many global companies with supply chains in China,” said the report, conducted by the global market-research firm TNS in England. “Financial executives now seem to realize that if a similar earthquake and tsunami occurred off the coast of China, the worldwide impact to supply chains could be much worse.”
Vinod Singhal, professor of operations management at the Georgia Institute of Technology’s College of Management, said the global economy would be slowed because China is both an exporter and importer of goods, causing “shortages in many consumer and industrial products that could lead to inflation and devastate the share price of companies.”
Even businesses that rely on domestic supply sources would be affected.
Consider Vibco Vibrators Inc. in Richmond. Karl Wadensten, owner, and Linda Kleineberg, marketing chief, said company supplies come from North America, but a disruption in China would result in higher prices and greater demand.
Vibco would expect suppliers to “command top dollar,” Wadensten said, especially from new customers in a jam who usually take their business elsewhere. He hopes that his domestic suppliers would reward the longtime loyalty of customers like Vibco. At Hope Global in Cumberland, Cheryl Merchant, CEO and president, said her business was “absolutely” affected by the Japanese tsunami and would be again if disaster hit China. But not because supplies dried up, but rather because sales did.
“Mostly, we supply them, Japan, China, Korea and India,” Merchant said, referring to the international market that Hope Global provides with braided and knit fiber products. “We ship to them. When Japan had its crisis, our customer requirements dropped like a stone. We would lose sales [if disaster hit China], but there would be no detriment to our supply chain.”
Zenofsky pointed to one particular area of China, the Pearl River Delta on the East Coast, that is especially vulnerable to a natural disaster because he said there is a “huge concentration” of manufacturers and “all sorts of” industries clustered there.
The area is of special concern to FM Global, an international business-property insurer based in Johnston, because many of its major clients – which Zenofsky said generally are Fortune 1000 companies or equivalents in size – have operations in that region of mainland China or rely on suppliers that operate there. He called that region “critical” to the world’s supply chains and to the global economy.
The report found that twice as many companies surveyed are more reliant on China as part of their supply chain for key product lines than they are on Japan. More than six in 10 companies reliant on China for supplies are more diligently considering the risk in China as a result of the Japan disasters, the study said.
As a result, the study found:
• Sixty-one percent of companies are considering “implementing a more robust risk-assessment process” to mitigate natural-hazard exposures in China.
• Sixty-five percent are considering “increasing collaboration with suppliers on mitigating risk at their locations.”
• Seventy percent are looking at developing alternative supply-chain sources.
“The increased supply-chain risk exposure in China underscores the need to look at supply-chain resiliency beyond just certain risk-management tactics and geography,” the study said. Zenofsky outlined a number of steps a company can take to help ensure the stability of its supply chain, steps also enumerated in the TNS report. First and foremost, he said, is the need to fully understand all aspects of a firm’s supply chain.
“The supply chain can extend through multiple parties,” he noted, citing as an example the manufacturing of computers that may need one supplier for keyboards, others for electronic elements and yet more suppliers for the many other components required.
It is important to know where suppliers are located and to learn about their “commitment to risk management,” Zenofsky advised. “Standards we take for granted in Western countries” are not seen the same in Asia, he said, where “the concept of risk management is relatively new.”
Companies reliant on foreign supply chains should consider developing “effective business-continuity plans,” Zenofsky said. “If you rely on a company in China and it cannot produce the product you need, do you have other suppliers you can turn to?”
Stocking up on extra inventory may work, depending on what it is that is over-stocked, Zenofsky said.
But even that won’t stop prices and demand from rising.
At Vibco, Kleineberg said a Chinese tsunami would have a “profound” effect on the company’s North American suppliers in terms of lead time, delivery, price and competition for the resources available.
Cumberland Foundry in Cumberland makes containers for Vibco, for instance, so American firms that usually get containers from Asia surely will seek out domestic suppliers like Cumberland in an overseas emergency, she suggested.
At Hope Global, Merchant is in the process of establishing what she called “a trading center” in China in preparation for establishment of a Hope Global manufacturing plant there in about one year. The plant in China will produce goods for the Asian market.
The FM Global-commissioned study saw 100 financial executives from large global corporations (more than $1 billion in sales) headquartered in North America interviewed by phone between July and September. China’s is the third-largest economy in the world, with approximately 60 percent of its economic activity taking place on the East Coast, with much of the Pearl River Delta located below sea level. •

No posts to display