An event doesn’t have to be catastrophic to disrupt the supply chain, said Tim Kolbus, vice president of global logistics solutions for Arrow Electronics Inc. A recent work slowdown at two of the U.S.’s busiest seaports is a prime example. Even though the event wasn’t deemed a strike, it will take an estimated six months to clear the backlog of cargo that’s accumulated in Los Angeles and Long Beach, CA, experts say.
As a $23 billion global distributor, Arrow plays a significant role in its suppliers’ and customers’ business continuity. Any disruption, Kolbus said, can have a long-lasting effect on a manufacturer’s global supply network. During the port slowdown, factories in the U.S. were unable to secure raw materials that they imported from overseas. Finished goods ready to export languished on the docks. Respondents to the Institute for Supply Management’s monthly business index as far back as January said the slowdown was affecting deliveries of Asian purchases, and many manufacturers were air freighting parts from Japan and Asia to support production.
Ever since the 2011 natural disasters in the Far East, Arrow has perfecting its business continuity team, a cross-functional group within the distributor that manages supply chain disruptions. Although that capability has always been part of Arrow’s business, the severity of the recent events prompted a more formalized structure. For example, Arrow’s Global Network Operations Center monitors utilities, shipping and news feeds for relevant information. “We also have various third-party resources funneling us information for weather, natural disasters and other business-impacting events,” said Kolbus. “Our business continuity team uses all of this information to assess the risk and associated business impact of a particular event, circumstance or situation.”
Once an event is identified, the business continuity team is mobilized. The team may be managed from the geography where the disruption occurred. Arrow’s business continuity teams are made up of representatives from all major functional areas within Arrow across the globe. They include purchasing, human resources, operations, transportation, finance and sales. “We are able to react pretty quickly when we are made aware of something early,” said Kolbus. “Once the right people are involved we begin with internal and external communications such as posting notices on Arrow.com. This is all driven by the business continuity team.”
In the case of the port slowdown, Arrow had two constituencies to serve: the suppliers that were shipping components and the customers waiting to receive them. For shipments that were still in transit, Arrow began to look for alternatives to the California ports such as Vancouver. It also looked at alternative means of transportation, such as using air freight instead of ocean transport.
In both cases the alternatives meant adding some kind of cost to the equation. But in situations like this, Arrow has something its suppliers and customers may not have: leverage. As a multi-billion-dollar distributor, Arrow is a significant customer to logistics companies such as DHL, FedEx and UPS. “Our relationships with these companies enable us to move products better than most no matter what,” said Kolbus. In some cases, Arrow was able to get shipments released from the ports in an expedited manner. In other cases, Arrow searched its global inventory for parts that could be diverted internally to fulfill delayed orders. The distributor also kept in contact with logistics companies so it could tell customers how much of a delay they could expect. Since customers deal with Arrow – not the suppliers whose products may be delayed – customers hold Arrow accountable for on-time shipment, Kolbus explained.
Media reports estimated the dock slowdown resulted in millions of dollars lost for many industries, particularly food and beverage. Others incurred costs for shipping alternatives. No supplier wants to pass such costs on to the end customer. “In many cases we’d present a number of alternatives and ask our customer ‘what do you want us to do?’” said Kolbus. “There was no one-size fits all solution, and in many cases our sales reps worked with us on a daily basis to see what customers were willing to bear.”
Global industry, global disruptions
Most electronics distributors have been managing similar situations for decades, but the globalization of the industry has prompted companies like Arrow to tweak and formalize business continuity teams. “In the last five years, as we and our customers have become more global, we are looking at more disruption,” said Kolbus. “There were the tsunami and earthquake in Japan and flooding in Thailand. We have also learned from the recent East Coast weather situations and have folded lessons from those into our playbook.”
A recent survey of supply chain executives by SCM World found natural disasters are no longer at the top of the ‘concerns’ list. “In 2012, 23 percent of survey participants were ‘very concerned’ and a further 44 percent ‘somewhat concerned’ about natural disasters,” the report said. “In 2013, these figures have fallen to 13 percent and 39 percent respectively. Concerns about supply shortages – the top concern across all sectors last year – and disruptive incidents such as fires and strikes have also dropped by several percentage points.”
Supply chain executives are now more worried about commodity-price volatility and product quality. To some extent distributors can smooth out price spikes by adjusting prices with their suppliers’ support. But even though inventory is seen as a liability by the stock market, maintaining quantities of components based on supplier and customer forecasts is still a core business of electronics distribution.
Working with logistics companies on a global scale has been a significant transition for Arrow and one that brings challenges and benefits, Kolbus said. On one hand Arrow has become a large customer of global logistics companies and can negotiate significant discounts with these organizations. On the other hand, it means Arrow has to manage its own operations in the most effective manner. “We have to evolve our network and put our warehouses in the right places to service our customers whether that are building in the U.S. or Asia,” said Kolbus. “We have to look at our own logistics footprint and make sure we are in the right places.” Since distributors break down bulk components to ship in smaller volumes than suppliers, consolidating numerous small orders into a single outgoing shipment minimizes costs.
For the supply chain, the key, of course, is to prevent or at least anticipate problems. “I think that is where Arrow does well; we work with supply chain disruption and that is where our customer value is,” said Kolbus. “If we are aware of a problem before our customers are, we can work to solve the problems in advance.” For Kolbus – who oversees Transportation and Trade Compliance for all Arrow business units, including Reverse Logistics, IT/Systems and Global Components – that also means threats to the security of the supply chain. Arrow participates in security initiatives such as C-TPAT, or the Customs-Trade Partnership Against Terrorism. C-TPAT involves a series of voluntary steps to help protect shipments against some forms of terrorism. Conformance can help move shipments across borders more quickly. “We do carry C-TPAT in the U.S. and AEO in Europe,” Kolbus said. “While those certifications help us with customs clearance during normal business operations, C-TPAT wasn’t able to help us with the West Coast dock slowdown because those delays were caused in a different part of the import process.”
Another issue the electronics supply chain will continue to wrestle with is the practice of lean. One of the tenets of lean dictates there is no more inventory in the pipeline than is absolutely necessary. Lean made it hard to recover from the 2011 weather events that paralyzed manufacturers in certain segments of the supply chain such as hard disk drives.
“Traditional supply chain risk concerns centered on certainty of supply, but recent natural disasters have shed a brighter light on how fragile the system is,” SCM World’s report concluded. “Here again, increased visibility of the role supply chain must play in assuring business continuity has upped the ante for all of us.”