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Supply chain aftershocks

Bob Parker | March 21, 2011
Although pale in comparison to the heart wrenching human tragedy in Japan, large manufacturers are trying to assess the impact, both near and long term, on their supply chains.

BOSTON, 21 MARCH 2011 - Although pale in comparison to the heart wrenching human tragedy in Japan, large manufacturers are trying to assess the impact, both near and long term, on their supply chains. In his prescient book on manufacturing, In Praise of Hard Industries, Eamonn Fingleton discusses the Japanese industrial strategy of not only being a force in brand ownership (Toyota, Sony), but to be a key manufacturing source for the whole value chain from base materials to electronic components. It is that very strategy that is now causing severe disruptions across several value chains:

Automotive -- It has been reported that Toyota is losing $80M per day largely due to several strategic suppliers being located in the Northeast. Even if plants were not damaged, power has been unreliable. General Motors, who also relies on suppliers in northern Japan for global production, has cut overtime at its Korea plants in anticipation of parts shortages and expects the impact to reach other parts of the world. GM reported that the complete picture wouldn't be known for several weeks.

High Tech -- A critical nation for semiconductor supply, - particularly flash memory - the effects are already being felt in an industry that, prior to the earthquake, was already utilizing high levels of capacity. Apple has announced that lead times for the new iPad 2 have already been extended to seven weeks, largely due to a lack of memory components. Having a source of reliable energy is critical to getting this industry back to running normally and there is little optimism that the nuclear issues will resolve either favorably or quickly.

Base Materials -- Several Japanese chemical companies including Mitsubishi, Mitsui, and Sumitomo operate chemical plants in the Northeast that went on emergency shutdown. Japan is the second largest steel producer (after China) and its largest producer, Nippon Steel, reported that one of its plants was inundated by the tsunami and remains offline. The Sumitomo Metals facility in Kashima is also inoperable. The combination of lost capacity and rising oil prices equate to chaotic supply and pricing for these materials for the immediate future.

Consumer goods -- Food supplies and markets, particularly rice and seafood (spinach and milk have also been mentioned),, are severely impacted by the events in Japan. In the longer term, fears of food contaminated by radiation will require additional monitoring to reassure both the domestic and export markets. Japan is also one of the largest markets for premium goods across food, apparel and other consumer goods categories. It is likely the disaster will severely crimp this revenue.

There has been a lot written and discussed in the business media about the impact of the tragedy on markets. The term supply chain is being used quite a bit, occasionally by someone who understands what it means. Our interest, as always, is in how well or poorly supply chain technology supported company needs in dealing with the unexpected event. We come away with four recommendations:

Modernize supply chain response management

More mature industries like automotive are taking much too long to evaluate the impact of supply shortages. To hear company officials they should have a good handle on the situation "in several weeks" is a huge red flag. The expectation isn't to fully anticipate the event, but to respond much more rapidly as we saw in the high tech/electronics segment.

Go deeper with supply risk assessment

While the electronics industry responded quickly, the mitigating tactics were only one or two levels upstream in the supply chain. To illustrate the point, a key adhesive in electronics manufacturing has been severely impacted by the circumstances in Japan and may ultimately cause more disruption than flash memory. It appears the response models didn't account for a supply item this far up the supply chain.

Reassessment of global supply networks

As demand becomes more and more global, supply networks must follow. It is not enough to simply chase low-cost labor rates, manufacturers must consider both total cost and proximity to demand. Beyond these considerations, globalization (i.e. diversification) of supply will also limit the effect of local or regional disruptions.

Better supply/demand contingency models

In base materials, industry planners seem unable to answer the question as to whether lost capacity (supply) will increase prices or lost demand will lower them. Also, the analysis necessitated by events in Japan must be combined with the implications of the unrest in the Middle East to allow for more comprehensive contingency planning and more effective supply response.

We give a lot of credit, deservedly so, to the investments industry has made in supply chain planning and execution in terms of being able to deal with major market shifts. This was certainly true during the recent recession when these systems created a greater ability to respond. The events in Japan, certainly the severity, are nearly impossible to be fully prepared for and, while supply chain systems are delivering, there needs to be additional improvements in order to better mitigate risks and speed response.

 

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