Rapid Ratings Blog

Hanjin's Default Raises the Alarm for Just-In-Time Inventory Strategies

Posted by Rapid Ratings on December 19, 2016

Can Predictive Supply Chain Risk Management Come to the Rescue?

When the world’s seventh largest shipping container line filed for bankruptcy protection three months ago, it surprised many companies that rely on ocean freight.  According to the Global Trade Review, companies with lean supply chains and Just-in-Time (JIT) inventory strategies cried, “Oh, ship!”  Was the first bankruptcy of a major ocean carrier in 30 years a single, surprise event, or something that was clearly predictable? Can effective Supply Chain Risk Management (SCRM) with predictive analytics help keep lean supply chains flowing smoothly?  

Learn about the "5 Strategies to Maximize Supplier Risk Management in 2017" in our on-demand webinar.

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Lean practices widely adopted from Toyota’s original success have moved from manufacturing sites to supply chains. Consumer products, especially electronics, automotive, fashion, and even aerospace depend on lean supply chains.  Those supply chains often rely on ocean freight and have benefited from the reliability and predictability of price and, more recently, falling costs of ocean freight. Almost every industry has been able to lower operating costs and achieve better cash flow by deploying JIT strategies. The key to JIT is a reliable network of suppliers to depend upon. The increase in capacity over the years and the rapid price drop for ocean freight puts those reliable networks at risk.

When a Link in the Global Supply Chain Breaks the Benefits of JIT Inventory, Strategies Flip to Liabilities: Lessons from the Hanjin Default

Hanjin’s demise sheds light on the value of SCRM for lean supply chains relying on global sourcing and ocean freight. Hanjin’s bankruptcy as an event impacted many leading companies across the full range of industries with global supply chains. However, it was not really a “single” event but rather a problem that grew over several years.  Rapid Ratings’ predictive analytic, the FHR® (Financial Health Rating), showed clear danger for any company relying on Hanjin. In the chart above, Hanjin is in the High Risk category, dropping there a year in advance of the bankruptcy. For more details, download the FHR® report for Hanjin Shipping.

Unfortunately, if you made it through Hanjin unscathed, you might not be out of the woods just yet. Rapid Ratings’ examination of the shipping container industry found the average FHR® of five of the top public global container shippers at a 34 and in the same High Risk category as Hanjin. The forward-looking nature of the FHR® has consistently served as a predictor of corporate health and failure, where 91% of firms defaulted below a rating of 40 and in High Risk or Very High Risk categories. This low average FHR® signals that Hanjin could be the first of more shipping industry collapses.

3 Reasons Just-In-Time Supply Chains Require Investment in Risk Management

Clear warning signs of potential disruption ahead mean that supply chain managers must double-down on financial risk assessment of their suppliers. Here’s why:

  1. Fixing Mistakes Can Be Costly
    In the event of a disruption such as Hanjin where inventory is stalled, a company’s attempts to salvage the production process, such as rushing replacements by air, can be 10X the cost or more literally overnight.

  2. Increased Exposure to Disruptions
    The production of goods is heavily reliant on suppliers. A lean supply chain means that there is less time to recover from disruptions such as natural disasters, supplier bankruptcies, or events that prevent on-time delivery of goods and, ultimately, your ability to serve your customers’ needs.

  3. JIT Leaves Little Room for Error
    Since the point of JIT is to hold as little inventory as possible, there is minimal stock, if any, designated to reworking faulty products in a timely manner.

Using Financial Health and SCRM to Protect Your Lean Supply Chain and Global Procurement

As every aspect of JIT production requires complete supply chain synchronization, the benefits of JIT will never be fully realized without sound risk management practices. When managing the risk of disruption, the strongest and most predictive risk indicator remains the supplier’s financial health. Gaining insight into the financial health of suppliers, for both public and private companies, enables risk managers to choose what suppliers to do business with in the short- and long-term, regardless of their geography, industry, or company type. To see what a thorough supplier financial health evaluation looks like, request a complimentary FHR Report.

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Topics: Supplier Risk Management, Bankruptcies & Default Studies