Supply-chain disruption is only one of many worries

As American manufacturers increasingly reach across the country and around the world for component parts, they risk becoming victims of disasters many time zones away. It may be balmy and calm in Cranston, but a typhoon in the South China Sea or a political upheaval in Latvia could shut down an essential supplier and bring a local manufacturer to its knees.
Companies can respond by worrying endlessly about everything from ice storms to labor disputes in distant places. Or they can conduct careful analysis and planning to ensure their supply chain is reliable, protected and redundant.
An informal survey of Rhode Island companies shows most executives are aware of the issue and have thought about how they would cope with it. Most manufacturers interviewed have alternate or backup suppliers for essential parts and materials, following the notion that it is inherently risky to place all the company’s supply-needs eggs in one basket.
However, people in the industry say the possibility of supplier breakdowns is not at the top of most Rhode Island executives’ worry lists.
“It is certainly an issue,” said John Grady, executive director of the Rhode Island Manufacturers Association. “But I don’t hear a lot of discussion about it. Manufacturers already have so much on their plate.”
Andrew Brown, an executive with Whittet-Higgins Co. in Central Falls, which makes retaining components for power transmission systems, said he hears more concerns about the risk of depending too heavily on a single customer than on a single-source supplier.
Probably few businesses in Rhode Island have thought more about supply-chain protection than FM Global, a mutual industrial property insurer that serves multinational companies.
FM Global’s executive vice president, Ruud Bosman, has written a paper describing the dire consequences for a manufacturer of a supplier breakdown: reduced revenue and market share, busted budgets, crippled production and distribution, and damaged credibility with investors and stakeholders. Further, the vulnerability of supply chains is aggravated by outsourcing and just-in-time inventory, which allows little wiggle room in an emergency.
The solution, Bosman wrote, is to identify the weak links in the supply chain and take measures – such as conditions in the supplier contract – to shore up weak areas. The supplier contract could require that the supplier follow strict fire prevention and safety standards, for example, allow audits of its facility, and commit to risk management procedures.
Also, when choosing a new or backup supplier, companies should not pick an understudy with the same weakness as the main supplier. “You wouldn’t want two suppliers on the same power grid or down the street from each other on the same beach in Florida,” said Steve Zenofsky, spokesman for FM Global.
Robert Lee, a senior vice president with Taco Inc., a Cranston-based manufacturer of hydronic systems, said that a few years ago, the conventional wisdom was for businesses to use single-source suppliers to reduce duplication and waste.
Lee and other executives don’t buy this; they say that unless you are Wal-Mart – so big that your suppliers depend on you for their next breath – single sourcing is a bad idea.
“Whenever we contemplate a source of supply, we are required to have a quick backup supply,” Lee said. “The backup supplier is someone who is in business every day for other customers.” Lee added, “You cannot compare pricing. Even if it cuts into your margin you have to protect your market share.”
Brown, of Whittet-Higgins, agreed that a company cannot protect its supply chain on the cheap. He also emphasized that loyalty to a major supplier is enormously important, because when the chips are down, that supplier can summon its own backup resources for the benefit of the manufacturer.
“You don’t buy purely on price all of the time,” Brown said, “If you buy on price you are probably shifting vendors a lot.” About three years ago, Brown said, his company’s major steel supplier, Republic Engineered Products, suffered a major breakdown of its blast furnace. Republic had backup blast furnaces, but not enough production capacity for all of its customers. But because the two companies had been doing business for 30 years, Whittet-Higgins was at the top of Republic’s list, and its shipments were not disrupted.
“Loyalty does have strong advantages when things go wrong,” he said.
Brown’s greatest supplier-breakdown worry is something he said he can do nothing about: the electrical power grid in the Northeast. For an outfit with a $20,000 monthly electrical bill, parking a generator in the compound for backup is not an option. Whether he likes it or not, Brown admitted, he has no backup plan for a serious blackout.
Other local manufacturers say they don’t need to worry about supplier breakdowns. Bob Clement, president of The Allied Group, a printing company in Cranston, says Allied has contingency plans for a disaster on its site, but loss of a paper supplier is “pretty far down on our list of threats” because there are so many paper makers.
“The whole world would have to blow up before we could not get a source of paper,” Clement said.