Both man-made and natural disasters have interrupted the electronics supply chain in recent years, from the horrific events of September 11, 2001, to the ongoing tragedy in Japan.
Each time, there's been an examination of how uncontrollable events affect not just humanitarian aid but also the overall flow of supply around the world. Each time, it becomes more apparent that a supply chain that relies on global outsourcing and lean inventory practices has significant vulnerabilities.
Vertical integration -- the old model where companies such as IBM developed and manufactured everything in-house -- clearly has its disadvantages. Maintaining a leading edge in all areas, from chip technology to after-sales service and support, requires a huge R&D investment by an OEM. Outsourcing various functions to subcontractors that are best in their field, whether it be silicon wafer fabrication or shipping packages all over the world, enables an OEM to focus on what it does best. Subcontractors, in turn, can leverage economies of scale to remain cost-competitive and reinvest in focused R&D.
These subcontractors have been able to enhance their cost advantages by moving to low-cost labor regions such as China. Leading-edge supply chain practices, such as just-in-time and lean, keep inventory levels at a minimum. It's a great system, until there's a catastrophe on the scale of Japan's.
A report by the Associated Press chronicles how the auto industry will be affected in the following months. It also includes a summary of some of the events that recently disrupted the supply chain:
The 2001 terrorist attacks in New York and Washington froze global transportation. The 2003 SARS outbreak shut down production in southern China. The eruption of a volcano last year in Iceland stopped air traffic over Europe. And now a disaster is unfolding in Japan.
[Stanley Fawcett, a professor of global supply chain management at Brigham Young University] says companies are starting to rethink the wisdom of depending entirely on supply chains that must cross oceans. In the mid-2000s, he says, some U.S. companies started moving factories from China to Mexico. There, they could still take advantage of cheap labor without having to contend with ocean crossings.
He says he suspects the trend -- called "near-sourcing" -- will become more popular after the disaster in Japan.
The high unemployment rate in the United States has put pressure on both governments and companies to conduct business closer to home. The cost of doing business in the US has so far been considered prohibitive -- or at least expensive enough to inhibit competitive pricing. The human cost of the tragedy in Japan is inestimable. But when companies are able to re-focus again on business, the impact of a disrupted supply chain will be significant. It's not just factories in Japan that will be shut down for lack of electricity, labor, or supply -- the effects will be global.
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