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Editor's Note: This article originally appeared in the February 2012 issue of SMT Magazine.
Still recovering from the impact of Japan’s tsunami disaster in May of last year, the manufacturing industry was recently dealt another blow as Thailand suffered its worst flooding in more than 50 years. These force majeure events caused considerable supply chain disruptions in many industries at a time when they were still reeling from the disruption caused by Icelandic volcano in 2010.
In Thailand, specifically, driven by government incentives, opportunities to lower costs, and reap tax rewards, manufacturing companies have been lured to this lower-cost region, including the provinces bordering Bangkok. The result of which is that the area has become the Silicon Valley of the Far East, with many automotive and high-tech companies now conducting a large amount of critical component manufacturing there. Sadly, during the floods, seven of the industrial estates bordering Bangkok were under water, with thousands of people being put out of work and global supply chains for some of the world’s biggest manufacturers significantly disrupted and under threat yet again.
Figure 1: An aerial view of the Chaophraya River, Ayutthaya Province, Central Thailand, October 12, 2011 (Source: AP).
The events in Thailand have been a major humanitarian disaster, with over 400 deaths, one third of the country flooded, and over 9 million people directly affected. It hit many industries and some major companies very hard, with more than 14,000 factories suffering some degree of flooding. Industries which suffered include automotive, semiconductor, hard disk drive, and EMS. The flood waters disrupted eight major OEMs in the automotive sector, with an estimated loss in production of approximately 250,000 units in Q4 2011. As a result of the complex network of local suppliers, and the fact that hundreds of lower-tier component suppliers have been affected, predicting recovery has proved very difficult. The loss of critical suppliers has particularly impacted major Japanese car manufacturers as companies shutter plants in Thailand and Japan due to critical component shortages.
Japan has suffered indirectly as one of the largest inward investors in Thailand with over 1,800 Japanese manufacturers operating in the country. Of these, nearly one third have been flooded. Motohisa Furukawa, Japan’s Economics Minister, stated, “Thailand is at the centre of Japan’s supply chain.” This disaster has been a double blow to the Japanese economy coming so soon after the country’s devastating earthquake and tsunami.
The hard disk manufacturing sector is probably the hardest hit due to the cluster of major manufacturers based in the affected regions in Thailand. It is estimated that the flooded plants across the top five suppliers account for nearly 30% of global supply of hard disks.
Figure 2: Bang Pa industrial Park, home of many HDD manufactures (Source: Bangkok Post).
Market watchers estimate that as much as 30% of the normal product levels will have been lost in Q4 2011, with the worst estimates being full recovery by Q3 2012. OEMs are working hard to maintain supply by switching production to other facilities, but component shortages from lower-tier suppliers is making that goal hard to achieve.
Figure 3: Total hard disk drive manufacturer (HDD) units; 2008 to 2011. The large number of component suppliers clustered close to the OEMs may be a strength that provides lower costs and shorter lead times in good times, but in Thailand this flooding event has demonstrated it is one of the weaknesses of this type of supply chain design.
What has been clear in the aftermath of the Thailand floods is that industries and companies that support higher reliability products or mission critical equipment and sectors have been less affected in the short term, as they hold higher levels of inventory and strategic buffers in different geographies than those affected. Perhaps this is a lesson for all supply chain managers.
The recovery in Thailand is continuing, but a full recovery is not expected for at least six months.
Thai Floods Teach a Lesson about Extended Supply Chains
The risk of supply chain disruption increases as the length of the supply chain increases, a trend not all manufacturers are willing to accept. With economic drivers focused primarily around cost and time to market, purchasers are constantly looking at their supply chains to offer lower-cost solutions that also deliver reduced lead times. Senior procurement staffs, traditionally challenged with cost-down and vendor reduction programs, are now being challenged to look at the risk of supply chain disruption. Increasingly, they are reviewing their policies and the number of suppliers is often being increased from single sourcing to off-set the risk.
Vulnerability of Leaner and Offshore Supply Chains
Becoming leaner and more efficient is the goal of any organisation in these times of economic uncertainty; however, at first glance, lean supply chains appear to be more vulnerable to disruption, but this doesn’t need to be the case. Planned strategic buffers, or safety stocks, coupled with alternative delivery plans (e.g., air over sea, local dual-sourced alternative suppliers, etc.), can create agile supply chains that provide continuity of supply while still holding true to lean principles. Whilst the cost of planning for contingencies for disruption can become prohibitive as the likelihood and impact of a possible event decreases, as with everything in supply chain planning, it really needs to be a balancing act, and the up-front thinking will help set this balance point.
Managing an offshore or outsourced supply chain in a low-cost region may appear to never have been so straight forward as it is now. The improvements in travel, communications, and technology, and the relentless pace of globalisation, have been drivers of extended supply chains. However, while some aspects of managing suppliers in low-cost regions have become simpler, the risks associated with these extended relationships have undoubtedly increased.
The speed of change driven by technology is clearly seen in the behaviour of global financial markets—natural disasters appear more frequent and have greater impact to extended supply chains, currency fluctuations, social and political unrest, increased customs and government compliance, corporate social responsibility, and governance and legal requirements are just some of the challenging developments buyers and supply chain planners have seen in recent years.
Whether we like it or not, disruption to the supply chain is becoming a common occurrence, and with the changing climate and natural disasters affecting the globe seemingly more regularly, businesses need to review their supply chains and risk management approach. OEMs are constantly looking for their supply chain to offer solutions to reduce lead times and lower costs. Senior procurement staffs, historically challenged with increasing the number of suppliers from single sourcing to off-set the risk, have more recently started focusing on reducing the number of suppliers they work with to consolidate spend with a handful of key suppliers. This process is far from uncommon and has inherent issues related to everything from quality to on-time delivery. Do Global Supply Bases Offer Immunity? The floods in Thailand, the earthquake in Japan, and the volcano eruption in Iceland have undoubtedly affected many supply chains across a host of industries; however, despite this, I feel positive that a global supply base provides a degree of immunity against force majeure events affecting a particular region or country. However, crucially, this is only true if the manufacturer is not single sourced or has a cluster of suppliers in one particular region or country. And whilst longer supply routes inherently introduce a degree of buffering via goods in transit, these should not be assumed as risk mitigation. Allowing the extended supply route to only have contingency provided by this in-transit buffering could have risks associated with it. Goods that are at sea six to seven weeks will be part of the supply pipeline, but events such as bad weather, port strikes, customs issues, and even shipwrecks can significantly delay cargo, leading to a major gap in your supply plan and line down situations. The use of strategic buffer stocks in extended supply chains is essential to ensure continuity of supply, but these must be planned, executed, and reviewed on a regular basis in line with changing demand patterns.
Flexibility, Robustness and Planning are Key
A supply chain that offers flexibility in its site of production, without any of the risk to quality, is the only sure way for manufacturers to remain operational during times of disaster or crisis. This may not be the low-cost option they’re hoping for, but, in the long term, the robustness of such of model will certainly deliver financial benefits to those prepared to take supply chain risk management more seriously.
Steven Healings is a Chartered Engineer and member of IET, CILT, and CIPS. He has over 20 years’ experience in supply chain, operations, and project management within the high-tech sector, including responsibility for major cost reduction programs, outsourcing projects, and delivering complex supply chain solutions to blue chip customers. Healings has been with eXception since 2007 on an interim basis and joined the company full-time in September 2011.