of production stoppages should not be overlooked. A highly integrated, interdependent supply chain that consists primarily of sole-source suppliers practicing just-in-time manufacturing with minimal inventories is highly reliant on the timely delivery of quality components and services. Failure by one participant to deliver can rapidly bring other parts of the chain to a halt. This happens, on occasion, even to the best suppliers and logistics providers.

Automakers, for example, who are under constant pressure to reduce costs, have tightened their supply chains to the point that they typically have less than a one-day supply of parts at final assembly facilities. Thus, a breakdown anywhere in the supply chain has the potential of bringing production to a halt (e.g., strikes at two GM parts plants in 1998 resulted in the shutdown of virtually all assembly operations within days, and flooding in 1999 at a single supplier in North Carolina reduced operations at seven DaimlerChrysler and three GM assembly plants to half-shifts due to shortages of a single part).

Potential threats, including storms, power outages, terrorism, computer hackers, disruptions in communications, and equipment breakdowns, can be very difficult to predict and costly to prepare for. In another example, the earthquake that shook Taiwan in September 1999 showed how a power supply disruption in one country can have worldwide reverberations through an entire industry. Damage to two electric power substations was the primary cause of a shutdown of Taiwan's computer-chip industry, which resulted in shortages of components and higher costs in the supply chains of OEMs around the world.

Supply chain participants must individually and collectively assess the probability of production-stopping events and their tolerance for risk, which must be balanced against the savings from increased sole-sourcing, tighter integration with remaining suppliers, and reduced inventories and production capacities. Thus, although good communications and resource sharing can be helpful in preparing for and responding to disruptions, supply chain, participants must be careful to avoid unacceptable levels of risk in their zeal for integration.

Recommendation. Small and medium-sized manufacturing enterprises should develop operating strategies based on an appropriate balance between supply chain performance and risk; assess the probability and effects of potential threats to their supply chains; and maintain sufficient (though sometimes expensive) slack, redundancy, and flexibility to keep the potential threats at manageable levels.

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