This week, the Asia correspondent of London’s Financial Times, Kevin Brown, created a small ruckus by asking whether Japan's March 11 earthquake represents, not just a momentary crisis, but a paradigm shift for global suppliers. Did the disaster, by stressing the system so drastically, throw the supply chain’s weaknesses into high relief? What changes might we see as a result?
The answer Brown comes up with is drastic: The system is not only fragile, he argues, but antiquated. The system thrown into chaos by a sudden act of nature was already eroding. And that was because it had not been built for the 21st century, for Asian consumers as well as producers. It was built for a world where Asia makes and the rest of the world (mostly North America and Europe) takes. The money quote:
The global supply chain made sense when most of it pointed in the same direction -- from Asian producers to western consumers. As Asia and Latin America join the consuming bandwagon it will make more sense for multinationals to site production and assembly close to their customers, which would have the side effect of cutting transport costs.
Is he right? Do we need a new Asian supply framework for the post-tsunami world?
Certainly, new variables were already being talked about before Japan’s horrific disaster. We’ve known for awhile that China's wages are climbing. And we've known that with the rise in wages, comes a rise in Chinese consumption. We're also seeing long-term trends toward higher fuel and environmental costs. On the savings side, pre-Japan we also knew that supply lines, while longer, were also more efficient every year, aided by technologies like RFID.
But until the tsunami, we hadn't necessarily combined all these factors into a broader risk profile. Japan's event points up risk in a way that was probably understood, but it was not so much in the forefront of our thinking before the tsunami. What does that risk profile look like now? We know a few things:
The Pacific Rim is going to remain troubled.
Though we didn't want to think about it before, it's hard not to notice that the global electronics industry's manufacturing base is located in one of the Earth's most seismically active regions. Japan's is only the second-worst such disaster in the region in the last decade, after the devastating 2004 Indian Ocean earthquake and tsunami, which affected nine different countries.
Major typhoons hit electronics manufacturing hubs in Taiwan last year, and the Philippines and Indonesia, two key shipping hubs, suffer urban floods regularly. Haze from burning forests in Borneo has snarled air traffic in Singapore and Malaysia several times over the past decade. Don't even ask about volcanoes.
Rebuilding takes time.
Last week, a widely cited investors' note from Moody's Investors Service argued that Japanese supply chains have held up surprisingly well after the recent disaster. But getting back online is a different story. Right now, companies are living on pre-disaster inventories. Capacity a year from now is really the issue, and it's a great unknown.
However important Japan's economic recovery is, the humanitarian situation takes priority, and it is going to be overwhelming for months, with thousands upon thousands of people needing shelter and whole municipalities needing to start over with new roads, schools, hospitals, power grids... For businesses, temporary supply chains may start to harden into permanent solutions after six to ten months of consistent use. Also, companies talk a good game about patience, but investors and the markets are notable for their lack of empathy, and surprisingly specific worries -- outside as well as inside the electronics industry -- have already come to light about the fragility of the supply chain.
Pre-March 11 supply challenges won't go away.
Post-Japan earthquake and tsunami, the electronics industry must have a conversation that's probably overdue -- about what kind of real risks exist within the supply chain and whether in light of Chinese wage increases we aren't seeing the jelling of an argument for sourcing closer to home. Once Japan gets back on its feet, it will be right back in a world where the old sellers are the new buyers; and savings on labor may no longer outweigh, at least not by as much as in the past, shipping costs. It was already a new world pre-March 11. But post-March 11, it's a lot harder to say we didn’t see the need to rebuild.
I agree. From the destruction will come a strong rebirth. Antiquated systems will be replaced out of necessity.
In hiring, you may have come across people that you know can do almost any job--you don't even care if they've ever done it before, because it's their intrinsic intelligence and energy that tells you things will get done. I think many manufacturers in Japan are like that. Likely. there will be rapid adaptation and improvement.
I am not sure if any significant sample of electronics exports was actually tested high for radiation, but i wont be surprised if this happens in coming days since the radiation level's are significantly high around the nuclear plant.
Interesting. Do we know whether a significant sample of electronics exports has actually tested high for radiation? Or is this just a marketing issue? I imagine it was already illegal to import or export something dangerously radioactive, before the disaster.
One more factor which affected the Supply chain this time around is radiation leakage. Several countries have banned imports from Japan fearing radiation contamination.
On the specific quake threat to technology: it's a very astute point that not just the factories and the Asia-based companies are in seismic zones, but really the technology industry is located around the shaky Pacific Rim. Silicon Valley is over the Santa Cruz mtns from the San Andreas Fault, and the Hayward Fault, which may be even spookier when you look at geologists' prognostications, runs right under San Francisco Bay. It's curious to think that such an industry is so specifically exposed to a particular, and particularly devastating kind of threat.
Brown is right in noting the suply chain is more about financial risk management than it is about actual supply and demand. A lot of the inventory the current structure deals with is actually theoretical rather than physical inventory, based on demand, leadtimes and forecasts...The current structure is also supposed to account for every possible "what if" scenario a computer system can create--all of this theory hasn't helped this time in acutal practice
As with many other human endevors, little regard is paid to the overall Economic position, but rather short term gain.
The supply chain is the way it is because of the financial incentives and as such it has grown to its current incarnation with very little regard to the geographical stability of any particular region, it is the same reason that a country would build ,not one but four nuclear reactors in a geographically unstable position, right next to an ocean prone to tsunamis.
The rebuilding of Japan will continue the same way it has in the past, that is to say with very little regard to the population of the effected area, it is a sad fact of life that many in Japan consider it none of their business or not their problem because they are to far away from the area.We may see a few officials bowing or 'crying' or saying sorry, but the reality is that many of the areas will receive little or no support.
There is of course a further issue to consider and that is of the radiation, the supply chain may actually become contaminated with radio active materials or emissions, putting any supplied products at a level higher than that of other suppliers, which in turn may then force consumers or governments to further restrict the supply chain even though it has entered a recovery phase, certainly as regards electronic components, there can be serious reliability issues related to stray particles, particularly as regards to Memory devices.
Japan has played a keyrole in the supply chain along with china and taiwan. But there is lot of reasons why the it is too costly to rebuild the Japan. It is very clear that they are at the risk in the future just like other countries in seismic zone. This could be one reason for the investors to look back and build the plants in other geographic without much problems.
While we have started worrying about the aftereffects of the earthquake in Japan and other Asian countries, we must also be well aware and alarmed that the Silcon Valley also lies in the seismic zone and may witness a similar natural disaster because of it being part of the very sensitive seismic zone. Such a disaster will upset the root business itself , leave aside the supply chain!
Flooding has affected two large high-tech industrial parks: Bang Pa-in Industrial Park and Navanakorn Industrial Park, where entire assembly lines are under water.
EBN Dialogue enables and encourages you to participate in live chats with notable leaders and luminaries. Not only editors and journalists, but the entire EBN community is able to comment and ask questions. Listed below are upcoming and archived chats.
Archived Dialogues
Thailand Stages a Comeback Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
Euro-Crisis: What It Means for High-Tech Firms Join EBN Editor in Chief Bolaji Ojo and Contributing Editor Jennifer Baljko on Thursday, July 12, at 10:00 a.m. EDT for a Live Chat on high-tech and Europe's economic difficulties.
Microsoft Surface: Potential Winners & Losers What are the implications for the electronics industry supply chain of Microsoft Corp.'s decision to launch its own tablet PC? Join industry veteran and EE Times' systems and OEM expert Rick Merritt on Tuesday, July 3, at 12:00 pm EDT for a Live Chat on this subject.
Join EBN contributor Jennifer Baljko on Thursday August 23, 2012, at 11:00 a.m. EST for a live chat on how electronic manufacturers in Thailand have shored up their supply chain to reduce the impact of future natural disasters.
Peter Drucker famously said "Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window." Yet in the razor's-edge world of electronics—with a lean supply chain and just-in-time demands—the need to know the future is vital.
While no one really can accurately predict the future, we can take guidance from another Drucker saying which is the best way to predict the future is to create it.
You've heard the saying "the No. 1 supply chain risk is your people." That hasn't always been the case. But today's complex global supply chain requires a new type of multitalented employee. It's one who understands, finance, marketing, economics, is savvy with technology, graceful with relationships and can think analytically.
Where are these people? Are universities properly preparing the next generation supply chain professionals? How do train your existing workforce for these new, demanding positions?
Brian Fuller, editor-in-chief of EBN, will lead a 60-minute Avnet Velocity panel discussion that will ask and answer these and other questions swirling around today's supply-chain talent challenges.
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