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The ongoing devastating monsoon floods that continue to impact Thailand will once again demonstrate the response management capabilities among high tech electronics and automotive supply chain teams.  The word “agility” is often an overused term in the context of supply chain processes, but in the case of the unfolding supply chain disruption, it will have significant meaning.

 

First and foremost, our hearts go out to people of Thailand.  The floods have now claimed over 500 lives, most from drowning, and countless thousands continue to endure the ongoing effects.  Weather forecasts indicate that the heavy rains, which began in July, will continue through the end of the year and we hope that the rains end sooner than that.

 

As with the March massive earthquake and tsunami that struck northern Japan, the cascading global-wide effects are still unfolding across multiple tiers of supply chains.  Flooding in the country has forced the closure of more than 1000 factories.  Thailand itself represents a significant vulnerability for hard disk drive (HDD) and Japanese automotive component production sourcing.  Estimates are that the region represents 70 percent of global HDD production. Western Digital, the global leader in HDD obtains 60 percent of its inventory from its factories in Thailand and the company has already indicated that it will ship less than half of planned supply for the remainder of 2011. Japan’s Nidec Corp., a major supplier of precision disk drive motors had the majority of its production capacity impacted, and news reports point to production workers ferrying available undamaged inventory on boats in an attempt to move the motors out of flood prone areas. Industry observers warn of an outright severe shortage by Q1 of 2012, if alternative production is not found. Unlike what occurred in Japan, HDD and component producers had minimal safety stocks to buffer a major disruption of supply.

 

A posting in Eweek cites industry participants noting that once the rain stops and access to flooded factories can be garnered, it would take 2-4 weeks to pump out flooded buildings and upwards of 60 days thereafter before production levels could resume. Some observers point to a 20 million unit shortfall in supply per month before normal supply levels recover, while more conservative estimates point to a 50 million HDD shortfall over the next two quarters.  Some have stated that the ongoing Thailand floods will have a greater impact on high tech and consumer electronics supply chains than that which occurred in Japan earlier in the year. That impact will surely cascade to global storage and PC manufacturers. The PC industry has already been in turmoil and this incident adds more business challenges. A New York Times blog posting (paid subscription or free metered view) further points to a pending impact for cloud computing and infrastructure providers further up the stream, who rely on continued acquisition of HDD hardware to support the explosion of cloud and data storage needs. 

 

For automotive supply chains, particularly those of certain Japan based manufacturers, Thailand based factories represented considerable sourcing of electronic components, plastic and rubber parts.  Honda and Toyota are the most impacted thus far, and pending parts shortages have already led to production cutbacks at multiple final assembly production plants including Japan, North America, and other geographic regions.  According to a Bloomberg Businessweek article, Honda has been especially hard hit with its two Thailand final assembly plants being totally submerged since October 6. Toyota estimates that since October 10, the floods have already reduced its Thailand based auto output by 69,000 vehicles. Jim Fulcher has provided a Supply Chain Expert Community posting that elaborates further on the cascading impacts for automotive supply chains.

 

Business and industry media this week has rightfully raised questions as to how these recent “black swan” or unprecedented natural disaster events have exposed vulnerabilities among industry supply chains. Has the quest for lowest cost production and hyper lean supply chains overridden and exposed vulnerability to significant business risk?

 

While many in the community can weigh in on that discussion, the immediate crisis at hand is once again, the testing of supply chain response management capabilities among those high tech and automotive companies currently impacted, and those that will be impacted.  After all, would an executive S&OP process ever consider the reality of mid double digit interruptions in critical supply or extraordinary supply price hikes caused from that shortage?  The answer is no!

 

However, during the Japan crisis, some companies such as Nissan, Cisco and Jabil demonstrated that once the disruption occurred, they had the ability to quickly assess overall supply and revenue impacts from multiple layers of their value-chains, and had the response scenario capabilities defined to either re-route supply from alternative sources, allocate limited production to key customers and distributors, specify and qualify alternative parts, or call on existing suppliers to help buffer impacts.  Even the supply chain teams of Honda and Toyota, that were the most impacted, eventually found ways to analyze impact areas and overcome disruption beyond original expectations.

 

Supply chain teams need to address two looming and significant cross-functional challenges in the days to come.  The first is re-visiting business and supply chain planning capabilities in light of the reality that major disruption, either internal or external related, is a given.  The ability to have scenario plans in-place along with the abilities to quickly assess and proactively respond to disruption are new table stakes. The second and longer-term challenge is a complete re-visit of component and finished-goods sourcing strategies in the light of what both the Japan, and now Thailand disasters have uncovered.  There can be no significant vulnerability to required supply streams, and every major geographic region requires an identified and well-understood business and supply continuity plan.

 

Bob Ferrari

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