You know the saying: “Those who fail to learn from history are doomed to repeat it.”
The natural disasters that buffeted the supply chain in 2011 are now history, albeit recent history. In March of that year, a massive earthquake, subsequent tsunami, and consequent nuclear disaster in northern Japan severely disrupted both the electronics and automotive supply chains. Then, in the fall, monsoons led to severe flooding in Thailand, swamping hundreds of factories, including several that made critical hard-disk-drive components.
(This story was originally published as part of EDN's Top 25 Global Electronics Component Distributors special report.)
The big question two years later: Has the industry learned its lessons? Would similar disasters today have such dramatic impacts? The year 2012 was mild, with a lower than usual number of dramatic weather events (with the notable exception of Superstorm Sandy in the United States), so it's easy to become complacent. But that's dangerous, if studies of climate change that claim increasing numbers and magnitude of violent weather events are accurate.
The truth is, only time will tell whether the supply chain is any better prepared today than in 2011. Some analysts say the events got the industry's attention enough to initiate some changes. But at least one analyst thinks the electronics industry is doomed to repeat history.
After 2011, several of Technology Forecasters' clients — especially midsize OEMs and lower-tier contract manufacturers — “came to us and said, 'We've had disaster preparedness on our to-do list for years; now we need to put it into place,' ” says Pamela Gordon, president of the consultancy.”
Bob Ferrari, managing director of Ferrari Consulting and Research Group and founder and executive editor of the blog Supply Chain Matters, also thinks the supply chain has learned from the 2011 disasters. “It was like our 9/11,” Ferrari says. “Although supply-chain organizations used to talk about the implications of a major supply-chain disruption, we had never really seen one until 2011.”
Consequently, companies are making some changes, according to Gordon and Ferrari. Specifically, at least some companies are doing the following:
Looking beyond Tier 1 suppliers
The Japanese tsunami, in particular, exposed real vulnerabilities in the lower tiers of the supply chain. OEMs initially were reassured when they learned that their first-tier suppliers weren't badly impacted, only to suffer later when they realized the disaster had wiped out some “40% of the silicon wafer supply,” says Ferrari. Today, companies are looking deeper into their supply chains to identify the components and materials that are sole-sourced or where the supply is concentrated in a certain geographic region (such as disk-drive manufacturers in Thailand).
Emerging regulations and political pressures are already pushing companies to get “full material disclosures” [FMDs] from their suppliers, which identify the countries of origin of materials and components, says Gordon. Now companies are seeing how useful these disclosures can be in a disaster. With FMDs, OEMs immediately know whether a given area is a key source of certain parts or materials, and can build alternative sources into their disaster planning, she explains.
Improving communications plans
The 2011 events exposed shortcomings in communication; it was more complex and took much longer than companies anticipated, says Gordon. Companies realized they needed better plans for how to communicate (if lines were down or power was out) and with whom they should be communicating, says Ferrari. It was the start of a new awareness “that social media can be a good alternative in communicating during a crisis,” he notes. Since 2011, more companies have started to monitor media such as Facebook and Twitter to get alerts when disasters happen, to get the word out to employees or suppliers in harm's way, and to receive information from the affected area when other means of communication are unavailable.
Indeed, Ferrari monitors social media carefully himself. In late March, for example, he saw a surge of reports on Twitter that a major 6.1 magnitude earthquake had occurred in central Taiwan. “Knowing that this area is the epicenter for high tech and consumer electronics supply chains, we immediately re-tweeted this news with hopes that our readers would be on alert to both the event and the potential for disruption,” he says.
Among the companies in the area are TSMC (the world's largest semiconductor manufacturer), United Microelectronics, Innolux, and AU Optronics. Although two TSMC facilities were reportedly evacuated, it turned out that there was minimal damage. But it was a reminder of how vulnerable Taiwanese facilities are. “They are all in that earthquake zone,” he says. “We dodged a bullet.”
Padding inventory, at least in critical areas
Having been caught short in 2011, purchasers are more likely to be able to convince a CFO that they need to put aside safety stock or line up alternative suppliers, says Ferrari.
Monitoring unstructured information
Some forward-thinking companies are using data mining and analysis on e-mail communications and other types of unstructured data, which can serve as a “kind of earlywarning system of supply-chain risk,” says Ferrari. Such tools can help zero in on important information during a crisis, to monitor the situation in real time, and also to piece together data that may give a more complete and accurate assessment of the situation than can any one supplier. After all, “the natural human tendency is to hedge. Nobody’s going tell their major customers, ‘we really took a hit here and it may be a month before we get out of this,’” says Ferrari. “You’re not going to get that right away.”
Malcolm Penn, founder and CEO of Future Horizons, is less optimistic. He maintains that most companies have done nothing to become better prepared for natural disasters, despite all the damage inflicted by the calamities of 2011. “There was a lot of scurrying around, but I don’t think anybody has changed structurally the way they do things,” he says.
Although OEMs say they are looking beyond their Tier 1 suppliers and improving communications systems, Penn is skeptical. Have they really investigated how they would cope if a TSMC facility were destroyed in a Taiwanese earthquake, for example? “I can’t think of a single customer that would go to TSMC and say, who are your wafer suppliers, and who are the suppliers of your wafer suppliers? Who supplies the slurry to grind the wafers down?” he says.
Even if they asked, he adds, “TSMC wouldn’t tell them.”
The electronics supply chain lives in a dangerous neighborhood
Asia comprises some of the riskiest areas in terms of the likelihood of natural disasters and the economic damage they can inflict, according to a recent report by Maplecroft, which analyzes risk of all kinds. The company compiles an index based on a country’s economic exposure to the risk of natural disasters. Among the highest ranked (of 197 countries) are Japan (No. 2), China (No. 3), the Philippines (No. 4), Taiwan (No. 6), and Indonesia (No. 8), according to Helen Hodge, head of maps and indices at Maplecroft. That means these countries have the most globally significant economic assets exposed to major natural hazards, particularly earthquakes and floods. “With the increasing global economic importance of these nations and their interconnectivity to global markets, a major event in one these financial centers increases the risk of economic contagion,” says Hodge.