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High-Tech Operating Antiquated Supply Chain

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 {complink 7155|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.

11 comments on “High-Tech Operating Antiquated Supply Chain

  1. AnalyzeThis
    March 25, 2011

    I think this is a very interesting subject to debate about. While I don't completely agree with Kevin Brown's opinion, I do acknowledge that he does have some very good points.

    I'm not sure if he's right … but he's not wrong .

    Marc, I think you summed things up nicely at the end there: the Pacific Rim is going to remain troubled, rebuilding will indeed take time, and those pre-March 11 supply challenges won't go away. With Japan specifically, it's not as if they were exactly in the best of shape before this horrible tragedy occurred: they certainly had a great deal of economic, social, and demographic issues with that aging population.

    While I'm not sure if I concur with the overall assertion that the high-tech supply chain is antiquated, I will agree that it does need re-evaluation in some cases.

    These recent events have given many us much to think about.

  2. Ms. Daisy
    March 25, 2011

    Marc;

    Thanks for the summary of Brown's discussion. It is often hard to hear the facts being stated bluntly. It is evident that the supply chain is too complex and there are many things that are based on assumptions with the basic self check of “what kind of real risks exist within the supply chain” is often avoided, and when touched upon is really uncomfortable to accept.  

    The current reality is what you stated in this article that the supply chain is no longer uni-directional, and Chinese wage increases is making the argument of sourcing closer to home a new reality, since savings on labor will no longer outweigh shipping costs with time. Also, the unpredictability of natures forces impacting many of these regions  with cheap labor (Taiwan, Phillipines, Malaysia, etc) coupled with questionable labor practices in many of them, is further begging the question, what are the real risks within the supply chain? It is time to collectively identify the risks and to figure out what needs to be done. There is an urgent need for a paradigm shift!

  3. prabhakar_deosthali
    March 26, 2011

    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!

  4. elctrnx_lyf
    March 27, 2011

    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.

  5. Hardcore
    March 27, 2011

    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.

    HC.

     

  6. Barbara Jorgensen
    March 28, 2011

    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

  7. Marc Herman
    March 28, 2011

    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. 

  8. SunitaT
    March 30, 2011

    Marc,

      One more factor which affected the Supply chain this time around is radiation leakage.  Several countries have banned imports from Japan fearing radiation contamination.

  9. Marc Herman
    March 30, 2011

    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.

  10. SunitaT
    March 30, 2011

    Marc,

     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.


  11. SP
    March 31, 2011

    Well Japan will strike back definitely. It might take some time but their processes will get more stronger.

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