In the aftermath of supply disruptions caused by major natural disasters in Asia last year, high-tech companies and
other enterprises making products with long lead times are
rethinking their stocking practices, according to a prominent trade lawyer.
“We see a return to companies holding three months’
[worth] of inventory [as a hedge against] supply chain disruptions,” said Michael L. O’Shaughnessy, an attorney with
Greensfelder, Hemker & Gale PC in Chicago, whose practice
includes negotiating supply agreements for clients.
Many Asian suppliers for U.S. companies suffered disruptions to their manufacturing and distribution operations by
the earthquake in Japan and the floods in Thailand.
O’Shaughnessy noted that the Thai floods were more disruptive to his clients because Japanese manufacturers
rebounded faster from the earthquake than their Thai
counterparts did from the flooding.
“The floods in Thailand spooked more people because of
the vulnerability it revealed in those plant operations,”
O’Shaughnessy said in an interview with DC VELOCITY.
The supply disruptions triggered by the twin disasters
have forced companies to rethink their lean production
and just-in-time delivery strategies of the last 30 years, said
O’Shaughnessy. At the same time, businesses making high-
value electronic goods need to be cautious about stockpil-
ing too much inventory for fear that upgrades or redesigns
could render their existing products obsolete, he warned.
In addition to expanding safety stocks, some of
O’Shaughnessy’s clients have begun diversifying their supply
base. The addition of a second supplier to ensure parts or
product supply, however, can raise procurement costs. Not
only might a second supplier charge more for its goods, but
the buyer now has to devise additional plans for delivery.
The lawyer is advising his manufacturing clients to
include a “force majeure” clause in their supplier contracts
to have the seller help the buyer find an alternative source
of supply if necessary.
One option for mitigating Asian supply chain risks would
be “reshoring,” or returning production to the United States
and closer to the points of consumption. O’Shaughnessy said
his clients are weighing that option more seriously. However,
most companies will not increase their domestic production
footprint if it means giving up the cost advantages they can
obtain by sourcing overseas, he said. ;
Asian disasters drive firms to boost safety stock
from end to end.
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