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August 24, 1998
Y2K bites the supply chain
With their own systems under control, manufacturers eye suppliers for Y2K bugs
By Blaise Zerega
When the conveyor belts start humming the first workday of the year 2000, many IT managers may find their minds wandering beyond the confines of their business. Although they may feel totally secure about their own manufacturing site's capability to hum without year-2000 glitches, the readiness of their supply chain -- the hundreds or thousands of suppliers scattered around the world whose compliance is critical to smooth operation -- will likely weigh heavily on their minds.
Whether it is the manufacture of guns or of butter, there are many systems beyond a manufacturer's control -- everything from dashboardmounted computers in delivery trucks to power delivery systems at utilities. Each of these systems poses a year-2000 threat and the potential for business disruption.
With so many potential weak links in supply chains, manufacturers need to examine their relationships with key suppliers. And although experts disagree on the extent and cost of supply chain disruptions, they agree that straight-ahead assessment, testing, and remediation approaches that have proven successful for internal systems must be applied to external vendors.
Paradoxically, the most fine-tuned manufacturers may be the most at risk. Analysts say two efficiency initiatives within supply chains -- just-in-time (JIT) inventory and a high-degree of automation -- increase a company's vulnerability to year-2000 problems from its business partners.
"The just-in-time system is certainly going to exacerbate the effects of the problem. In a just-in-time system, there are no contingencies in the event of an IT breakdown," says Ed Yardeni, chief economist and managing director at Deutsche Bank Securities, in New York, describing the fragility of today's supply chains. "Supply chains are only as strong as their weakest links."
With JIT inventory, companies drastically reduce lead times and they cease to stockpile inventory. This has been made possible by suppliers' increased manufacturing and shipping efficiencies. Now, companies depend on vendors to supply raw materials on short notice -- a move that saves inventory control costs and pushes the actual inventory costs off companies' financial books and up the supply chain to suppliers.
Automated intercompany communication in the form of electronic data interchange (EDI) also increases the risk of a company's computing systems being brought down by business partners' year-2000 problems through noncompliant interfaces and exchange of noncompliant data.
"If you are [electronically] connected with multiple external vendors, then you have a much higher risk of receiving a year-2000 bug," says Tom Oleson, research director at International Data Corp., in Framingham, Mass.
To ensure compliance within a supply chain, most manufacturers begin by identifying potential hot spots, assessing their risk, and fixing the problems. For example, the automotive industry has an industrywide compliance initiative under way that involves 125,000 suppliers.
But for many manufacturers, no industry initiatives exist and they must go it alone, with the largest companies spearheading compliance efforts.
Armstrong World Industries, a $2.1 billion manufacturer and seller of building materials in Lancaster, Pa., identified four critical areas within its supply chain: material supply, service providers, technology providers, and electronic providers.
Material supply is a large concern at Armstrong because there are more than 10,000 suppliers. To date, only about 50 percent of them returned surveys of readiness that were sent out in the first and second quarters of 1998, according to Tony Lombardi, year-2000 project coordinator at Armstrong. (See "Sears tackles Y2K compliance with partners," July 20.) Still, Armstrong's survey response rate is typical.
Some early reports on partner readiness are not very reassuring. The Securities and Exchange Commission found in its readiness report on 1,023 public and Fortune 100 companies that only 49 percent of companies "[had] plans to evaluate or [are] evaluating the year-2000 technology problems of those entities with which [they have] material relationships."
A TEST OF TRUST. Manufacturers say the best way to take control of the supply chain is to focus only on mission-critical suppliers. For example, Chicago-based Metz Baking, with 16 bakeries throughout the Midwest, selected 2,000 mission-critical suppliers from its pool of roughly 30,000 suppliers. Metz has asked only key suppliers for compliance statements, says Larry Hames, senior vice president of MIS at Metz, in Sioux City, Iowa.
Lombardi points out that in most cases, the only contact between suppliers and Armstrong is the trucks or rail cars that pull up to factory loading docks. For these companies, maybe half of all total suppliers, a written statement of readiness will suffice.
"A lot of it has become somewhat subjective based on the relationships we have with suppliers," Lombardi says. Armstrong purchasing managers are likely to base their decision about a supplier's year-2000 readiness on the basis of trust and experience.
Another manufacturer that is depending on trust and good faith from its noncritical suppliers is Coors Brewing, in Golden, Colo. Coors has roughly 6,000 key suppliers and maintains electronic interfaces with about 25 of them.
According to Byron Ferguson, expert developer at Coors, a written statement that a supplier is working toward readiness is sufficient in most cases. But for mission-critical vendors, an in-depth audit and test results may be required. Ferguson bases the definition of mission-critical vendors on the question: "Who is it that without them we can't make, ship, and sell beer, or move money?"
Metz also takes a trusting approach for noncritical suppliers.
"We just want some assurance that their trucks will arrive in January 2000," Hames says.
St. Louis-based food giant Monsanto is setting a deadline of the end of the first quarter in 1999 for its suppliers to be compliant. If these partners aren't ready, the company will reconsider the relationship.
"Anybody doing business with us that can't be compliant by the end of first quarter 1999 is putting us at risk," says John Ogens, director of Monsanto's global year-2000 program, adding "there are some exceptions."
Analysts agree that in situations where no industrywide testing exists, on-site assessments offer manufacturers the best assurance of their suppliers' readiness.
"If you can get to the supplier's site then you've mitigated your risk to a great extent," says Kazim Isfahani, an analyst at the Giga Information Group, in Boston.
But not all companies are prepared to perform on-site assessments and testing, fearing the legal ramifications of remediating another company's systems.
"Legally we can't even set foot on their premises because then we become responsible," Coors' Ferguson says.
Analysts say that potential legal liability is stopping companies from opening their systems to each other, and may explain why so few have conducted coordinated tests.
"There's an amazing sense of arms-length relationships when it comes to this issue," says Deutsche Bank Securities' Yardeni.
CONTINGENCY PLANS. One result of the wariness regarding year 2000 in the supply chain is the need for contingency plans.
Armstrong and Coors are now developing final readiness deadlines for key vendors, after which the companies will institute contingency plans.
However, analysts point out that switching vendors is not easy. There are transactional processes to be worked out and assurances that the new vendor is year-2000 compliant must also be obtained. Switching vendors may require retraining and walk-throughs.
In some cases, though, contingency plans are not possible. Alternative suppliers do not always exist, as is the case for manufacturers such as Armstrong.
"The biggest concern is the company that is a single source provider," Lombardi says.
For irreplaceable suppliers, analysts say manufacturers may have to brush legal concerns aside and perform year-2000 tests and remediation for them.
"I think forward-looking companies will get compliant even if it means doing the year-2000 work for [their business partners]," Isfahani says.
Armstrong maintains EDI interfaces with 40 to 50 percent of its suppliers and about 70 of its largest customers, according to Lombardi. The risk posed by EDI is that not all of Armstrong's business partners are moving to fully compliant year-2000 EDI. Some are electing to stay with two-digit years, which requires "windowing," a technique where an arbitrary year, say "29," is chosen as a cutoff between centuries. Thus, "28" will refer to 2028, but "30" will refer to 1930.
"It's perfectly legitimate as long as both sides of the communication understand what's going on," Lombardi says.
Lombardi says the situation will cause some headaches, but it will be worked out through coordination and testing.
For companies with only a few electronic connections the risk is minimal. For example, Metz has electronic tie-ins with only three suppliers, the company's bag suppliers. According to Hames, the risk posed by these interfaces is very low.
"We don't have a problem because they're using our software," Hames says.
OVERCOMING JUST IN TIME. Manufacturers insist that as long as trucks and rail cars arrive with supplies, production can go on, even if it means using a paper-based system.
"I assure you that Coors will be brewing beer at the start of 2000," Ferguson says.
How manufacturers will accomplish this remains to be seen, analysts say. To begin stockpiling inventories may require the building of warehouses and restructuring of accounting processes -- neither is cheap nor easy. There's also the problem of lengthy lead times for scarce raw materials.
"It's way too late to even imagine that we can move from a just-in-time to a just-in-case system," Yardeni says.
But the impact of a disruption in the supply chain is dramatic. Consider the recent 54-day General Motors strike, which forced the temporary closing of two parts plants. All manufacturing processes halted, putting 195,000 workers out of work and costing the manufacturer as much as $2 billion.
Senior Writer Blaise Zerega (blaise_zerega@infoworld.com) covers year-2000 issues for InfoWorld's Enterprise Computing section.