Sept. 11 attacks reveal supply chain vulnerabilities

The modern supply chain is a cornerstone of enterprise e-business. Manufacturers have spent countless millions on technology to support inventory practices that are unqualified successes -- until the attacks on Sept. 11.

In addition to the terrible loss of life and property destruction, the Sept. 11 terrorist attacks wreaked havoc with the nation's supply chains. Authorities responded to the emergency by implementing a broad array of security measures that grounded air cargo planes, prevented ships from docking at seaports, and stalled trucks at border crossings. Retailers couldn't get needed merchandise, and manufacturers suffered parts shortages. No one has measured the attacks' cumulative financial impact on supply chains, but the cost will certainly be measured in the millions.

The modern supply chain is a cornerstone of enterprise e-business. Manufacturers have spent countless millions on information technology that supports just-in-time (JIT) inventory practices to improve efficiency and reduce costs. JIT is credited with the consistent improvement in the U.S. Census Bureau's inventory-to-sales ratio--a key metric for measuring manufacturing efficiency--over the last 11 years. JIT is an unqualified success, helping manufacturers become more competitive and reducing volatility in the economy.

Until now. The Sept. 11 attacks clearly demonstrated the problem with overly lean inventories. Without adequate supplies, manufacturers are forced to shut down assembly lines, which can be extraordinarily expensive--as much as $10,000 a minute for some large manufacturers. Ford Motor Co., for example, reacted to the attacks by closing five North American plants due to parts shortages. "No one was prepared for an economywide disruption. We had a historic event that blew supply chains out of sync," says Kevin O'Marah of AMR Research. (For more, see AMR's brief, "Supply management deserves equal attention with demand management.")

Companies shouldn't walk away from JIT inventory management, but they should make adjustments. "People still want their inventories as low as possible," says O'Marah. "But the word 'possible' has a different meaning now." Ford is not abandoning its JIT system, on which it has spent millions of dollars, but will begin stockpiling engines and other key parts at some U.S. plant locations to prepare for future transportation disruptions.

Companies typically maintain a certain amount of extra inventory called "safety stock" to compensate for unforeseen shortages. However, most companies allocate only enough safety stock to handle relatively small problems such as a truck blowing out a tire or a defective parts lot. It's very difficult to set limits on safety stocks for a random event like the Sept. 11 attacks. Bruce Tempkin of Forrester Research describes the problem: "The dilemma with increasing safety stocks is that any increase will lead to too much cost all of the time but the increased stock is still unlikely to be enough to cover you in a real emergency."

Companies need to adopt a more thoughtful approach to inventory increases rather than a knee-jerk reaction that blindly increases safety stocks. Dwight Klappich of Meta Group says that "going back to warehouses full of inventory is not the right answer. Companies currently set safety stocks like a shot in the dark. They need to think a lot more about how they approach it."

To accomplish this, IT managers should consider specialized inventory-optimization software from vendors such as Baxter Planning Systems, Gain Systems, Optiant, Oracle, Rapt, and SmartOps. These vendors help with massive inventory-planning problems and can perform the necessary mathematics to evaluate and react to event probabilities such as changes in weather and other unforeseen circumstances.

Companies can also prepare for unanticipated supply-chain disruptions by using e-sourcing programs to identify alternative suppliers. You may not be able to get a widget from Mexico but you can still get one from a supplier in Indiana. Companies should use logistics software or suppliers that let them identify alternate delivery routes. This might let you reroute materials or merchandise to an alternative plant or distribution center rather than sending it off to an idle location.

One thing is clear: Sept. 11 is a big wake-up call for supply-chain managers and e-business champions to re-examine their IT systems for weaknesses and do a better job of preparing for future disasters.