United Parcel Service Inc.'s ability to deliver orders became a matter of life and death on Sept. 11. The company's UPS Logistics Group dug into supply-chain inventory and reprioritized shipping schedules to quickly find and deliver albumin, a protein needed to treat burn victims of the terrorist attack on the World Trade Center, to a midtown Manhattan burn center. When Mount Sinai Hospital's radiology department put out a call for a 60-pound piece of glass imaging equipment for an X-ray machine, UPS Logistics was able to immediately locate the part in a warehouse in Lyndhurst, N.J., load it into a delivery vehicle, and get it to the hospital within hours.

UPS Logistics, the transportation and inventory-management unit of $30 billion-a-year UPS in Atlanta, is prepared for disruptions in transportation because of its experience delivering goods when roads and airports are closed during blizzards, floods, or fires. But it didn't know if it was prepared for what happened last month. "We never faced anything as catastrophic as that. No one has," says Dave Currence, CIO of UPS Logistics Group. "But the systems we have in place to handle normal and more-than-normal exceptions allowed us to deal with these more-than-extraordinary events."

UPS Logistics ought to be good at supply-chain management. The third-party service provider holds inventory stockpiles for many of its customers, sometimes actually owning the goods until it delivers them. In addition to tracking software and other internally developed systems, the company uses a combination of supply-chain, warehouse-management, shipping, and resource-planning software from CTS Technologies, EXE Technologies, i2 Technologies, and Oracle that lets it quickly find every item on every pallet in every warehouse.

Nonetheless, the company and hundreds of its customers are re-evaluating their supply-chain strategies, recognizing that just knowing where everything is won't get parts to an assembly line in a different city or country. "There's a lot of rethinking going on concerning global-sourcing strategies within our company and among our customers and in companies around the country," Currence says. "Shipping could be disrupted, and you never know where the interruption could be."

Since the terrorist attacks on New York and Washington, many companies are shifting their supply-chain priorities from squeezing costs through inventory reduction to limiting the consequences of transportation disruptions on production. For the past year, the concept of lean-inventory management systems feeding directly into production lines--in other words, just-in-time manufacturing--has been the goal of companies looking to save money through more-efficient supply chains. But the Sept. 11 tragedy introduced a new reality for supply-chain managers faced with grounded flights, closed borders, and lengthy inspections of truck cargoes. "People are coming to see they need contingency plans so that in case something happens, there's a stockpile of critical parts somewhere," says Bruce Bond, a supply-chain analyst at Gartner.

To minimize the effect of such transportation disruptions, companies are reconsidering their lean-inventory strategies in favor of storing larger quantities of critical parts closer to manufacturing facilities. Arrow Electronics Inc., a $13 billion-a-year electronic-components distributor in Melville, N.Y., which has 13 distribution centers around the country, is working with customers to determine whether it can help them maintain miniwarehouses near production lines through the use of Arrow's proprietary inventory-management software. Arrow might open and manage such a warehouse, or a customer might open it and Arrow might provide the management services.

Bill Forster, Arrow's VP of worldwide logistics, says the company is increasing the inventory of parts it holds for customers and sees the same trend among some of its largest customers. For Arrow, decisions about whether to increase inventory depend on a number of factors, including the importance of a given part to one or more customers and whether an inability to deliver the part could halt production.

Boosting stores of easily accessible inventory may become necessary as tighter security results in more-frequent--and longer--cargo inspections by U.S. Customs at airports, on highways, and at shipping ports. "Every day we hear different requirements for the inspection of materials," Forster says. Among those requirements are hand searches and X-ray examinations of cargo, as well as additional testing, such as passing shipments through compression chambers to make sure that no device being shipped is set to explode at reduced atmospheric pressure. One airline that before Sept. 11 required no waiting time for cargo inspection now requires at least 24 hours, Forster says.

Another complication: The airlines have cut back their flight schedules and are canceling flights with low passenger loads. "We have to worry about the reliability of air transport; we don't know which flights will go and which will be canceled," Forster says. "It's difficult for airlines to meet expectations."

That's because priorities have changed. "The nation's security awareness has taken a quantum leap forward," says Mike Schaefer, director of EDS's supply-chain management, manufacturing, and retail industry group, who is also a U.S. Army Reserve colonel. "The nation is taking a look at how its supply chain is interrupted if the logistics chain is interrupted." Pravesh Mehra, Cap Gemini Ernst & Young's Americas leader for business-to-business and supply chain, doesn't expect many companies that have been redesigning their supply-chain systems for efficiency during the past few years to have a "knee-jerk response to the terrorist attacks" by significantly increasing on-hand inventory. But he also acknowledges that a "lean-and-mean supply chain assumes a very stable environment around us."

Companies need to rethink what components they've outsourced and where they've outsourced them, says Bruce Culbert, global supply-chain practice leader for KPMG Consulting. "If you've outsourced something offshore for price reasons, you might want to bring some of that work closer to home," he says. "It would be prudent for companies to think those strategies through again and understand the potential overall disruption for business. You want to have alternatives thought out."

Ford Motor Co. is one company that's adjusting its lean-inventory model. The automaker has stockpiled engines from Canada and other critical parts manufactured outside the United States. Ford is also re-evaluating its global-sourcing strategy for critical parts. Rival General Motors Corp. is developing a contingency plan that likely will include some stockpiling and a re-evaluation of its global-sourcing strategy. Both automakers are reconsidering whether a sole source for a part should be a supplier whose manufacturing facility is in another country.

AMR Research automotive industry analyst Kevin Prouty says DaimlerChrysler, Ford, and GM are all asking suppliers to increase the inventory of non-U.S.-made parts in the United States as one way to mitigate risk in the face of less-reliable international shipping and potential recurring problems such as border slowdowns or closings and air-shipment delays or stoppages. He notes that a supplier-managed inventory strategy forces suppliers to hold inventory and to bear the consequences of doing so.

Electronics manufacturer Flextronics Corp., which makes high-tech equipment ranging from Microsoft's Xbox game machines to Cisco Systems routers, requires many suppliers to keep about two weeks of inventory near its factories all over the world. The $12.1 billion-a-year company has its factories feed supplier-related information about inventory, raw materials, purchase orders, delivery performance, and other factors into an Oracle data warehouse, where supply-chain management tools from SeeCommerce are used to monitor pricing and performance to make sure suppliers are meeting contractual agreements. Flextronics, with headquarters in San Jose, Calif., and Singapore, also has tens of thousands of parts numbers, as well as inventory and demand information related to each part, flowing into the data warehouse via electronic data interchange and value-added networks.

The company has been moving toward supplier-managed inventory during the past year, and it credits that strategy for its ability to avoid major production disruptions since the attacks. "If you look at the events of the last couple of weeks, just-in-time may still involve shipping parts over large distances to reach a site," says Dale Tate, finance director of Flextronics' global procurement group. "The supplier-managed-inventory strategy has those key components located either at the factory campus or very close to a factory, such that your supply-chain risk is reduced."

Despite its responsive performance immediately after the terrorist attacks, UPS Logistics is re-evaluating its supply-chain technology to determine whether it will remain effective under the new conditions for doing business in the United States. "We have to take a look at what is the right technology to drive the new inventory models that we and our customers will need as the result of the events," Currence says.

Experts say the ability to adapt quickly to sudden changes in supply-chain activity and customer demand will be imperative. Hon Industries, a $2.04 billion office-furniture manufacturer in Muscatine, Iowa, is an example of that adaptability. The day of the attacks, the company received a 20-truckload rush order for office furniture from a customer in the Northeast. The customer that placed the order was setting up offices for companies affected by the World Trade Center attack, and it needed the furniture within five days. Jim McKeone, Hon's investor-relations manager, says filling the order was a daunting task, considering that the company is a just-in-time manufacturer, generally requiring two weeks to build orders and not holding inventory of its products.

Hon was already running at near-peak production levels, so it used Synquest Inc.'s supply-chain-planning software, which it had deployed in March, to redesign its logistics and supply-chain network and to reschedule production at its 18 factories. A key goal was to modify the production schedules to serve the customer with the 20-truckload order and minimize the effect on other customers. John Stock, VP of logistics, says the Synquest software helped the company determine how it could delay some customer orders and move production of other orders to open up capacity at its factory in Cedartown, Ga., where the rush order was built.

"The software allowed us to see much more quickly what our supply chain looked like, what deliveries of parts and materials would be like, and what changes we needed to make to the network," Stock says. Hon used its EDI connections with suppliers to alert them to the sudden demand, to relay orders for required parts and materials, and to determine suppliers' inventories.

Many CFOs, says Gartner's Bond, are starting to think it's more economical to minimize supply-chain disruptions by building up inventory selectively, deploying supply-chain software that allows flexibility in production scheduling, and working closely with suppliers to meet unexpected needs, rather than to be forced to halt production at a factory with a just-in-time manufacturing model. Agility once meant the ability to respond to whatever a customer wanted. But now, Bond says, people are saying it "has to include the idea of planning for disruptions in the supply chain that could keep you from serving your customer at all."

--with Larry Greenemeier

Illustration by Richard Downs