Procurement Strategies for Companies When Encountering Natural Disasters

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Introduction

The concept of procurement directly relates to the process of acquiring goods or services whether (raw or manufactured) in a way that enables a company to meet the needs of its clientele in terms of the quality of the product and quantity it is needed in.

Through the analysis of ( ), it can be seen that procurement is an essential process in all company operations since not all companies are able to extract raw materials, are capable of processing it into different components and have the capacity to assemble it into a viable product. It is based on this that when examining the manufacturing industry as a while it can be divided into 3 distinct types of companies:

A raw materials supplier
A components manufacturer
End product manufacturer

Manufacturing industry supply chain progression

Companies are separated into these distinct categories based on the need to focus on a type of a specialization that they are good at rather than attempting to diversify itself into all aspects that go into creating a finished product. By doing so, this enables a company to significantly reduce its cost of operations while increasing its capacity to be able to develop better product types.

Process in creating a finished product

A finished product can this be considered as the culmination of a company utilizing different suppliers and using its own manufacturing processes to create products to be sold. For example, one of the most popular gadgets that has been sold within the past 5 years has been the Apple iPad, yet, the company itself merely sourced the materials needed in its constructions from other companies within its supply chain

iPads are primarily manufactured in China by Foxconn (one of the largest electronic manufacturers in the world) with each individual part being purchased from different parts suppliers.

The processor utilized within the tablet was purchased from Intel, the motherboard was bought from local suppliers in Taiwan, the memory components that go into it were from suppliers in China, and the solid state hard drive was from Seagate. In essence, nearly every single part that went into you average Apple was the result of procuring individual product components from a robust supply chain.

Process Components Involved in the Development of the iPad

The parts manufacturers involved in the process of creating an iPad in turn sourced the needed materials that went into their own products from their own raw material suppliers as well.

This process is known as a procurement supply chain that starts from raw material suppliers and ends with the final product on the shelves of a store. Do note though that this procurement supply chain is not primarily limited to consumer electronics, it can also include manufactured agricultural goods and most of the everyday items that people see around their home.

The reason this is being brought up is due to the fact that while each type of product has its own manufacturing process and supply chain, all of them have the same characteristic in that they depend on the integrity and reliability of their respective procurement supply chains in order for their product to be created (Shuguang, 2010).

Supply Chain Concept

Due to the necessity of reliability in the provision of raw materials and equipment, this immediately brings up the question of what would happen a supply chain should an integral link in the process be removed due to an unforeseen external event (Shuguang, 2010). The end result would of course be obvious, the total and subsequent collapse of the chain which would prevent a product from being completed.

What must be understood is that the inherent problems with doing business in the current global system is the fact that unforeseen circumstances such as natural disasters have severe ramifications on the supply chains for most corporations.

Analysis Method Diagram

Production processes are vulnerable due to their dependence on a continuous stream of raw materials and components (Stecke & Kumar, 2009). Without raw materials, a capable labor force and a constant supply of energy in order to keep production facilities running, the end result is usually the entire system falling apart the seams.

All aspects of the product development supply are necessary to ensure that products can be created to meet consumer demand. The inherent problem though with natural disasters is the fact that they affect all aspects of the production process that was just mentioned in unique ways and, as a result, when they occur this creates considerable difficulties for companies.

Effect on Supply Lines

When natural disasters occur near areas where production facilities are present, the supply of raw materials that goes into the production line stops completely. Natural disasters prevent accessibility due to the destruction of roads and bridges which makes it difficult if not impossible to get the necessary raw materials to the factories they are destined for (Bunkley, 2011).

It should also be noted that companies would also be reluctant to send trucks to areas immediately after a natural disaster due to the possibility of a sudden recurrence. This precaution is actually justifiable as evidenced by a massive tsunami came that directly hit the Japan since after an earthquake had struck (Japan Earthquake, 2011).

It should also be noted that raw materials do not always come from local suppliers, rather, they can also come from international sources (as seen in the relationship between China and Australia involving iron ore and coal) (Financial performance, 2006).. The problem with this is that the various docks and piers designated for the offloading of cargo may have been affected by the natural disaster itself which creates a certain amount of difficulty in terms of getting the raw materials off of a ship and towards a production complex.

The raw material suppliers themselves could have also been affected by the tsunami resulting in their own facilities receiving considerable damage which further complicates their capacity to be able to send raw materials to their various clients (Winslow, 2011).

Effect on Production Capability

When the 2011 earthquake and tsunami struck Japan, it revealed a vulnerability that modern day methods of production had wherein even though a facility is located hundreds of miles away from where a disaster actually happen, there is still the possibility of that particular disaster affecting the ability of that factory to produce products. This is due to the effect natural disasters have on power grids as well as the fact that it can prevent the delivery of essential parts and supplies (Lohr et al., 2011).

It should also be noted that due to the earthquake and tsunami as well as the damage to the Fukushima dai-ichi nuclear reactor, factories located as far away as Tokyo had to slash to lower their production capacity to less than half of what they were normally capable of accomplishing on a daily basis due to issues related to worker safety, the loss of essential parts from Mitsubishi Heavy Industries that had factories near the disaster zone as well as intermittent power outages (Lohr et al., 2011).

Factories located within Tokyo and various surrounding districts were thus unable to meet their production targets for the month which created problems for buyers from other countries such as the U.S. and China who relied on the scheduled delivery of essential parts and components (Bunkley, 2011).

Sample Situation

The 2011 earthquake in Japan and the subsequent tsunami that followed created numerous problems for the Japanese manufacturing industry located near Sendai and Fukushima (Bill, 2011).

The tsunami destroyed several integral power plants and cables in the area which prevented numerous factories from operating within the immediate vicinity.
The resulting destruction of several roads prevented raw materials froming going to the factories that needed them.
The death of several family members prevented a large percentage of the workforce from going to the factories.
The radiation scare from the Fukushima Dai-ichi nuclear power plant made the remaining workers unwilling to go to work due to the threat of radiation poisoning (Kluger et al., 2011).

Examining the Issue

The issue most companies have with natural disasters is that they stop the process of production in businesses located in the area of a disaster by affecting not only the workers, but also the facilities themselves and the capacity of raw material; suppliers to gather the necessary supplies for their clients.

The degree of damage to production facilities can thus be considered as inversely proportional to the strategy of procurement that companies will apply. As such, this will be elaborated on in the next section in order to get a better idea of the strategies that can be employed after a disaster occurs.

Minor or no Damage to Production Facilities

Minor or no damage is the best outcome after a natural disaster since this ensures that the supply line of a company can be restored within a matter of two to three weeks while the company itself deals with the aftermath of the disaster (i.e. repairing facilities, replacing equipment, etc.) (Wimmer, 2000).

This also comes in the form of restoring the delivery of raw materials to the factory, as well as encouraging workers that have not died to come back to work as well as having to send condolences to the families of workers that had died during the course of the disaster (Wimmer, 2000).

Medium Scale Damage to Facilities

During instances of medium scale damage to production facilities, this can come in form of light to moderate damage of the facility, the surrounding machinery and possible flooding in certain areas which will need to be dealt with (Chopra & Sodhi, 2004).

In the case of medium scale disasters, it can take up to one to two months to get the factory working again. For buyers, this means that they can either wait for production to start back up or they can switch to a temporary supplier until such a time that their original components supplier can re-establish itself in their supply line (Financial performance, 2006).

Large Scale Damage to Facilities

Large scale damage to production facilities means the destruction of the building itself along with nearly all of the factory’s production equipment and machinery. During such instances, it is unlikely that a company will be able to supply anything for at least a year or more due to the necessity of having to rebuild their facilities that were destroyed (Financial performance, 2006). For buyers, this means re-establishing a new supply line with a completely different company.

Summary

There is an old saying that states that “you should not put all your eggs in one basket”, what this means for the strategy of procurement in light of the possibility of natural disasters is to diversify sourcing strategies in order to prevent the possibility of being supply blocked

There are several possible procurement strategies that could be employed in order to diversify supply lines for products, however, while each method does have its own merit, it also comes with several negative aspects that should be taken into account before creating a procurement strategy that centers around them.

Ethicality Statement

The research process for this paper primarily consisted of document analysis in order to gather the necessary facts and figures. During the entire process of research and examination, the researcher followed proper research ethics by:

Utilizing only relevant academic literature for examination
Checking alternative sources of information to ensure that the information being utilized is accurate
Implementing proper citation and acknowledge for the instances where information from relative academic sources were utilized
In no way were any research subjects (though none were utilized) harmed during the process of data collection.
None of the information utilized within the study has been falsified in any way.

Overall, the research can confidently state that through the aforementioned practices that were implemented, this research study has followed proper ethical research guidelines in researching and presenting information for this report.

Client Report

Possible Procurement Strategies to Avoid Supply Problems due to Natural Disasters

The first strategy that has been developed by this report would be to diversify the supply of integral components through several suppliers in diverse regions and countries instead of a single main supplier for the component (Perry, 2007). The advantage of this method is that should the area of one supplier be affected by a natural disaster, the remaining supply lines would still be viable and could “pick up the slack” so to speak of the lost supply line (Perry, 2007).

One problem with this method is the fact that by separating the amount of components supplied through several companies, the company purchasing them actually loses out on savings from buying in bulk that could have come from ordering from a single company (Dillon & Mazzola, 2010).

Based on this, procurement strategies in the future will need to take into account what they desire out of their supply lines, either constant supply reliability through diversification of buying strategies or savings through concentration in a single company (Dillon & Mazzola, 2010).

Another problem to take note of when it comes to supply diversity is the possibility of shifting quality standards when sourcing from different companies from different locations. Companies have their own set of quality standards, business culture and safety regulations that they adhere to depending upon the region in question. For example, companies within China have a much lower degree of corporate social responsibility as compared to companies within Japan, the U.S. and various European countries.

Their production processes often do not take into account the subsequent environmental impact of heavy industrial manufacturing processes which enables them to use procedures that would seem environmentally unethical in companies within countries with strong standards of corporate social responsibility. Sourcing the same type of component from Germany, China and Japan would result in two distinct differences, namely: the price of the component and its inherent standard of quality (Manuj & Mentzer, 2008).

What this means for a company that is attempting to diversify its supply chains is that there would be a distinct difference in cost between the parts supplied as well as overall quality (Manuj & Mentzer, 2008). This would result in the components of the same product being invariably better or worse than others. This of course creates a problematic situation for a company’s quality standards since the differences in component quality have to be taken into account during the quality control process.

Another possibility that could be taken into consideration is that assuming the quality standards of the suppliers a company is sourcing a single component from are the same the company could merely source the same component from different locations to avoid interruptions in the supply chain. The inherent problem with this situation is the differences in cost due to the distance of delivery.

If a company were to source products from different suppliers yet all of them are located in the same general area this makes the concept of supply diversity useless since they would all be hit by the same natural disaster. One method around this would be source products from different regions or better yet different countries (Skoufias, 2003). The advantage of this method is that it would prevent natural disasters from hitting all suppliers at one time.

As mentioned earlier, the problem with this is the differences in overall costs in delivery with some locations that are nearer obviously costing less than those that are far away. In cases such as this, companies would then choose to have a majority of their supplied components coming from locations that are nearby thus lowering the cost of transportation (Skoufias, 2003). In this situation, it is assumed that all components cost the same and that it is the cost of delivery that causes differences in prices.

Another approach to the problem comes in the form of simply obtaining suppliers from locations that are not prone to natural disasters thus there would be little risk of disruptions. While this method of procurement is sound, there is still a problem as to whether there would actually be a components manufacturer in an area that is not easily affected by natural disasters.

Work Log

Work Log 1

During this week it was determined that while there are a variety of possible solutions available to prevent interruptions in the supply chain, they are not without significant setbacks.

The inherent problem with trying to prevent any and all supply chain interruptions while taking into account the possibility of natural disasters is the fact that there are too many factors at work to actually create a 100% effective plan that can mitigate all problems. It was discovered that the best possible solution would be diversify the supply chain to such an extent to ensure that production does not stop completely should a supplier be affected by a natural disaster.

Work Log 2

While it was mentioned in the earlier work log that diversification would help to reduce the potential threats brought about by natural disasters, it was determined that this would cause problems in terms of profitability as compared to sourcing from a single supplier. The fact remains that anchoring a supply chain to a single lone supplier can and will cause problems to a buyer should an outside event affect their production capability as seen in the case of Apple Incorporated and their suppliers in Japan.

Work Log 3

Research into possible areas not directly affected by natural disasters shows that areas located in the Middle East have fewer natural disasters as compared to other locations around the world. Unfortunately, their industries are neither agriculturally nor industrially based and, as such, would prove to be viable locations for sourcing only if a company was dealing with petroleum based products. If not, they would not prove to be useful at all.

Work Log 4

In this work log, the viability of sourcing from a single supplier was examined. Unfortunately, as it was stated earlier, this means the supply line is isolated to that particular supplier and should anything happen to that company as a result of a natural disaster the production capabilities of the company sourcing that particular component would grind to a halt.

Overall Summary

Through this activity, I have come to learn that businesses do not operate within a vacuum and, as such, business managers and product sourcing specialists need to take into consideration a plethora of different factors when it comes to ensuring the integrity of their respective supply chains. While natural disasters cannot be anticipated in their entirety, the fact remains that plans can still be established which should help to lessen their impact on a company’s supply chain.

Reference List

Bill, O 2011, ‘Japan Hit by Massive Earthquake’, O’Reilly Factor (FOX News), Academic Search Premier, EBSCOhost.

Bunkley, N 2011, ‘Japan’s Automakers Expect Longer Delays’, Academic Search Premier, p. 1.

Chopra, S, & Sodhi, M, 2004, ‘Managing Risk to Avoid Supply Chain Breakdown’, MIT Sloan Management Review, vol. 46, no. 1, pp. 53-62.

Dillon, R, & Mazzola, J 2010, ‘Management of disruption risk in global supply Chains’, IBM Journal of Research & Development, vol. 54, no. 3, pp.1-9.

Financial performance 2006, ‘Supply chains after disruptions an event study’, Supply Chain Management, vol.11, no. 1, pp. 25-33.

Japan Earthquake, 2011, ‘Thoughts and Implications’, Emerging Markets Monitor, vol. 16, no. 47, pp. 1-3.

Kluger, J, Harrel, E, Powell, B, & Walsh, B 2011, ‘Fear Goes Nuclear’, Time, vol. 177, no. 1, p. 34.

Lohr, S, Bunkley, N, & Kopytoff, V 2011, ‘Supply Disruptions of Power and Water Threaten Japan’s Economy’, Academic Search Premier, p. 1.

Manuj, I, & Mentzer, J 2008, ‘Global supply chain risk management strategies’, International Journal of Physical Distribution & Logistics Management, vol. 38, no. 3, pp.192-223.

Perry, M 2007, ‘Natural disaster management planning A study of logistics managers responding to the tsunami’, International Journal of Physical Distribution & Logistics Management, vol. 37, no. 5, pp. 409-433

Shuguang, L, Jun, L, & Hayes, K 2010, ‘An agile and diversified supply chain reducing operational risks’, Competitiveness Review, vol. 20, no. 3, pp. 222-234.

Skoufias, E 2003, ‘Economic Crises and Natural Disasters Coping Strategies and Policy Implications’, World Development, vol. 31, no. 7, p. 1087.

Stecke, K, & Kumar, S 2009, ‘Sources of Supply Chain Disruptions Factors That Breed Vulnerability and Mitigating Strategies’, Journal of Marketing Channels, vol. 16, no. 3, p. 193.

Wimmer, S 2000, ‘Procurement Pros Stay Afloat in Wake of Natural Disasters’, Government Procurement, vol. 8, no. 2, p. 7.

Winslow, G 2011, ‘Japan Quake Shakes TV Equipment Suppliers’, Multichannel News, vol. 32, no. 12, p. 25.

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