In this article, I will explain the concepts of Supply Chain Disruption and Resilience. We will also examine why the American automotive giant Ford couldn't deliver thousands of vehicles to customers because it couldn't find a simple windshield wiper chip, costing only $0.40 each. Similarly, we will analyze and simulate the supply chains of two Japanese automotive giants, Honda and Toyota. In doing so, we will also look behind the scenes of the post-pandemic automotive and chip crisis and closely examine the concept of "Supply Chain Resilience."
I have used three academic articles in this field to prepare this article. At the end of the article, you will find my more detailed 22-page report on supply chain resilience, which I prepared based on these articles.
Supply Chain Resilience
In this article, we will examine this increasingly popular concept in detail. We will also look at how this concept emerged and why it has become popular. We will examine strategies for ensuring the strength of the supply chain. Finally, we will conduct analyses by giving examples from the sector.
What is Supply Chain Resilience?
To understand supply chain resilience, we first need to understand the concept of supply chain disruption. A disruption is a random event that causes a supplier or other element of a supply chain to completely or partially cease functioning for a period of time (usually an indefinite period).
Accordingly, supply chain resilience is the ability of a supply chain to return to its original state, or even a better state, after experiencing a disruption.
Why Does the Supply Chain Need to Be Resilient?
Global supply chains have been exposed to uncertainties and crises on an unprecedented scale in recent years. Natural disasters, pandemics, geopolitical tensions, wars, and technological embargoes have begun to disrupt the functioning of purely cost-focused chains. This has led firms to focus on "resilience" strategies instead of "efficiency" strategies.
How is Supply Chain Resilience Achieved?
First, we need to understand that there is no one-size-fits-all strategy. You can apply different strategies depending on your company's industry, its role within the industry, and its business model. However, we can generally examine these strategies in three main groups:
- Proactive Strategies: These strategies are measures taken to prevent any disruption in the supply chain before it occurs.
- Reactive Strategies: These are the steps that need to be taken after a chain disruption to keep operations running and restore the chain to its original state.
- Supply Chain Design Quality Strategies: These strategies can be considered measures taken during the supply chain's establishment phase. In fact, these are the most basic proactive measures; however, applying these strategies to established, functioning supply chains is quite difficult.
If you would like more detailed information about what these strategies are, you can check the report link at the end of the article.
Supply Chain Disruption
We've gained an understanding of the concept of resilience. However, to fully comprehend why we need resilient chains, we need to grasp the concept of disruption and the Ripple Effect in logistics.
Why Do Disruptions Occur in Chains?
First, we need to understand that even if you are not at fault, mistakes or changes in the behavior of your customers or suppliers can disrupt your plans.To better understand this, we should look at the concepts of "Forward Disruption" and "Backward Disruption":
- Forward Disruption: These are disruptions originating from your suppliers that spread forward in the chain (towards the customer). That is, the disruption moves in the same direction as the flow of materials. For example, if a fire breaks out in your supplier's factory, they cannot send you products; this disrupts your production and consequently your customers.
- Backward Disruption: These are disruptions occurring at the customer level and spreading backward in the chain (towards the supplier). That is, the disruption moves in the opposite direction of the flow of materials. For example, if a fire breaks out in your customer's factory, they stop taking orders from you. In this case, your stocks become idle, and you reduce your purchases from your own supplier.
Probability of Disruption According to Company Business Model
In this section, I will explain the conclusions reached by academics based on scientific research. First of all, as you know, there is no single business model or supply chain. This means that the risk of experiencing disruptions is different for each company. To better understand this, we will examine companies in two main categories: Distributors and Assemblers.
Distributors:
- These companies buy goods from a small number of suppliers and sell to a large number of customers.
- We can think of these companies as wholesalers. They buy large quantities of goods from a small number of suppliers and sell smaller quantities to a large number of customers.
- These companies are more likely to experience disruptions. While having a wide variety of customers helps protect against the effects of crises, it also increases the number of points where they can be affected by disruptions.
- Let's look at an example to better understand. Suppose you have 5 customers and you sell to them regularly. If one of your 5 customers experiences a disruption, the impact is significant because you are left with only 4 customers to sell to. However, if you had 10 customers, even if one of them experienced a disruption, you would still have 9 customers to sell to. This is advantageous in terms of protecting against the effects of a disruption. However, the more customers you have, the higher the probability of one of your customers experiencing a disruption. This also increases your own chances of experiencing a disruption. Think of it this way: the more people you talk to during the day, the higher your chances of getting sick. Therefore, instead of the "the more customers, the better" mentality, it's important to strike a balance and build trust with your customers.
Assemblers:
- These companies purchase goods from numerous suppliers, assemble them in their factories, and sell them to customers.
- Examples of such companies include Toyota and Honda. They obtain goods from many suppliers, assemble them in their factories, and sell them as finished products to customers.
- These companies are more likely to experience future disruptions because they work with many suppliers. If one of their suppliers experiences a disruption, it can halt their production as well.
- We will examine the Ford example in this area in the following section.
Sectoral Analyses: From Theory to Practice
In this section, by examining industry data, simulations, and examples, we will see how the concepts of disruption and resilience, which we learned earlier, are applied in the real world.
Toyota and Honda Simulation: 63 Common Suppliers
In this section, we will analyze the supply chain structures of two Japanese automotive giants, Honda and Toyota, using a comprehensive scientific article that examines their supply chains. First, let's look at why the researchers chose these two giant companies. They did so because they found that the two companies share a total of 63 suppliers. The authors of the article sought to answer the question, "If Toyota invests in its suppliers, will Honda also benefit?"
The answer they found, as you might guess, is: "Yes, they will benefit." In other words, if Honda or Toyota decides to make strategic investments in their suppliers to increase their supply chain resilience, their competitor benefits from this without any cost. This introduces us to the concepts of "Mutual Benefit" and viability. Two rival giants can strengthen themselves together by making joint investments for their mutual benefit. To better understand this, let's consider a scenario where all the suppliers of the two giants are completely different from each other. In this case, Toyota would have to invest in all its suppliers individually at different levels. However, in the current situation, by collaborating with Honda and sharing costs, they can create a "win-win" situation.
Ford Example: Production Disruption Due to a $0.40 Windshield Wiper
This example is a great illustration of the forward disruption we discussed above. As you may recall, these disruptions propagated in the same direction as the flow of materials from suppliers. As you know, we experienced a chip crisis after the pandemic. This was because, when the pandemic began, car manufacturers predicted a decrease in demand, and when lockdowns started, they canceled their existing chip orders. In fact, this situation is one of the most concrete examples of the Bullwhip Effect crisis in logistics literature.
The supply chains for semiconductors, which we call chips, are very complex and sophisticated. Therefore, a supply process like "I'll place my order today and it will arrive in 3 days" is not possible. These orders are placed months in advance, and who will receive them and when is determined by strict schedules. Therefore, even though there was a drop in demand in the automotive sector at the beginning of the pandemic, the demand for consumer electronics from end-users increased enormously because everyone was confined to their homes. Technology giants, seeing the opportunity presented by the car companies canceling their orders, wanted to take advantage of the capacity gap created after the cancellations. Giants like Apple increased their existing orders. Therefore, companies like TSMC, which produces chips, had their order capacities filled for months.
Ford was one of the car companies that canceled its orders. However, contrary to their predictions, demand recovered faster than expected, and people wanted to buy cars again. In this situation, car companies had to be added to the customer base in the chip sector, which was already experiencing a boom in demand. But as mentioned, capacities were already full. Therefore, car giants couldn't find chips for months. One of these companies was the American car giant Ford. They couldn't find a very simple chip, which sells for $0.40 each and enables the windshield wipers to work. Therefore, their production was disrupted for weeks.
Conclusion and Analysis
These examples show us how important supply chain resilience is and that efficient supply chains focused solely on cost reduction no longer work in crises of this magnitude.
Sources and Further Reading
- Semiconductor supply chain resilience and disruption: insights, mitigation, and future directions - (The Ford example in the article and the fundamental basis of the chip crisis analysis).
- Ripple effect in the supply chain network: Forward and backward disruption propagation, network health and firm vulnerability - (The main source examining forward and backward disruptions and the concept of "Ripple Effect").
- Designing resilient supply chain networks: a systematic literature review of mitigation strategies - (The scientific basis of the proactive and reactive strategies mentioned in the article).
- Image designed by Freepik
Detailed Analysis Report
You can access my comprehensive 22-page report, which includes all the mathematical details of supply chain resilience, investment models, and the cases I mentioned in this article, via the following link: