Adding to the risk of fallout from any disruption in the supply chain is that most companies today operate using the “just-in-time” model for inventory. Based on an approach developed by Toyota, it essentially means that companies do not maintain much inventory; they order parts and equipment as they need them, which cuts costs. But that lack of inventory can make a company vulnerable. The risk is that when a disaster like an earthquake strikes and destroys existing inventory or existing production capacity, there is no backup inventory to make up for the loss.
Renesas, as noted, is one example of a company that is aggressively working to reduce its exposure to supply-chain risk. It already had arrangements to ensure that 80 percent of its microcontrollers could be produced at an alternative supplier if need be. Now, it is working to up that to 90 percent. “We are now establishing a system to enable a multi-[factory] approach so that, in case another disaster strikes, we can quickly shift to those [other factories],” says Ali Sebt, CEO at Renesas Electronics America.
In addition, the company is working to establish contractual arrangements with more suppliers of raw materials to reduce the chance of a supply disruption if one of its primary suppliers is affected by a natural or man-made event. “We’re going to have more alternate suppliers of those raw materials, but also understand who is supplying to our suppliers [and] have better visibility into their health and their well-being,” Sebt says. The company will do that, in part, by making sure that its suppliers are not single-source suppliers (more on that concept ahead).