SCDigest editorial staff

The News: A recent special section on logistics in Britain’s Economist magazine highlighted the increased risk companies have when outsourcing and extreme lean are combined.

The Impact: There has been a lot of attention recently on supply chain risk mitigation and resiliency, and with good reason. Companies must develop new ways of determining the right balance between lean cost reduction and acceptable risk profiles.

The Story: Economist magazine is the latest to recount the unexpected problems cell phone makers Nokia and Ericsson had in 2000 from what at first seemed like a relatively unimportant incident at a Philips electronics semiconductor plant in New Mexico.

There was a small fire at the plant, and a relatively trivial number of chips were lost from production. Production was expected to resume within days, which was a relief to the cell phone makers, who had “single sourced” the chips to the Philips plant.

Then came the “Uh oh.” In the clean room environment, the small amount of soot and smoke had nonetheless contaminated large areas of the plant. Production was severely curtailed. Ultimately, Nokia was late releasing a critical wave of new phone models, and (perhaps relatedly) Ericsson soon partnered with Sony for cell phone production.

Of course, many would say the simple answer is that the two companies should have had dual sources of supply, and that in hindsight seems clear. But the magazine brings up the story in the context of this question: Can companies get too lean?

Economist quotes one executive at an insurance company that underwrites supply chain risk. Companies “are galloping there. I don’t think many understand the risks that are involved” from the combination of global outsourcing and lean supply chains.

The largest companies have the volumes to support multiple sourcing locations. But mid-sized companies, or even the smaller divisions or products of larger companies, may not have that luxury.

While no one wants to compensate by carrying piles of inventory, some rebalancing may be necessary. The article quotes Ted Scherk, of logistics consultants Colography, as saying “You will have to carry a little more inventory than an absolutely lean model, but you get protection.”

Let us know your thoughts.