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How to Mitigate Supply Chain Disasters

The major natural disasters in Japan and Thailand in 2011 underscored the global electronics industry's vulnerability to production disruptions. However, these calamities also served as a crash course for high-tech enterprises, providing important lessons on how component and system suppliers should prepare and react to such challenges.

In this age of globally connected supply chains, it's critical for semiconductor suppliers and buyers to understand the nature of the risk, and to have effective plans to deal with production disruptions of any magnitude in any region of the world. While much attention has been lavished on the impact of the major catastrophes in 2011, the truth is that disasters come in all shapes and sizes, ranging from war to fires, to epidemics and political upheavals, to terrorist attacks and power outages, to computer hackers and viruses.

The direct impact of such disasters on a company's business can be huge. The destruction of a manufacturing facility, for instance, can result in a loss of production that takes 18 months or more to recover. The indirect effects of a disaster can be just as painful. Disasters tend to accelerate the end-of-life of components. They also change buying behaviors of purchasers, causing them to seek alternative sources for parts. Such developments can have adverse impacts on both suppliers and buyers.

Because of this widespread impact, Wall Street will be looking to see how effective companies' disaster mitigation plans are. Stock analysts loathe earnings uncertainty as a rule and will reward companies that prepare properly while punishing those that don't.

Although disasters can affect any business, the electronics and semiconductor industries can be particularly susceptible to such problems, given their widespread use of just-in-time, lean manufacturing, and build-to-order methods. These systems stress the importance of minimizing inventories, which can lead to critical part shortages amid supply disruptions.

Furthermore, production of semiconductor and other electronics components and systems are located in several Asian locations that are exposed to disaster risk — both natural and manmade. These areas include Japan, South Korea, and Taiwan.

Finally, the trend toward rationalized production is creating single points of failure that can result in supply disruptions for semiconductor makers and their customers. Many key semiconductors are single-sourced and cannot be easily obtained from alternative suppliers. Also, the expense of building new wafer fabs has soared into the billions of dollars, causing the concentration of production into a few campuses.

Despite these challenges, some electronics firms in recent years have employed successful strategies to contain the effects of disasters on their operations. One notable example was Fujitsu Semiconductor's management of the Japan earthquake disaster. Less than three months after the quake disrupted production at five facilities, the plants had returned to full production.

For {complink 2149|Fujitsu Ltd.}, the key to success lies in its disaster planning efforts. Three years before the major disaster of 2011, the company suffered a quake that impacted production at its semiconductor fab in Iwate prefecture. In response to the disaster, the company established a system where fabs in different parts of the world can pick up slack if one facility is hit by a calamity.

Fujitsu also instituted a business continuity plan designed to restore electricity, water, and other utilities following a disaster. The plan involved the installation of equipment that can limit seismic damage to wafers.

Disaster preparedness is critical for both suppliers and buyers. However, the two sides often have different considerations when developing their respective plans. From the seller's perspective, the central question is one of cost: How can my company remain a world-class supplier without incurring too much expense? For the buyer, the main issue revolves on dependability: How does my firm maintain reliable supply while keeping costs manageable?

But for both semiconductor suppliers and buyers, disaster preparedness involves a two-step process comprising the creation of a disaster risk profile and development of a mitigation plan.

A disaster risk profile is defined as the measure of a company's exposure to one or more disasters based on a number of metrics, including:

  • Depth of sourcing, i.e., if a product is sole sourced or thinly sourced
  • Geographic production diversity
  • Geographic diversity of inventory storage
  • Transport mode and route diversity
  • Geographic robustness of information technology system
  • Lifecycle status of products, regarding accelerated phase-outs and counterfeiting
  • Country of production, accounting for geopolitical and economic risk

To create a disaster risk profile, a company must make a complete map of its supply chain –including its suppliers' supply chains. This map must span the complete chain, from raw materials to electronic components, to contract manufacturing, to production equipment. The geographic location of each node of production must be charted relative to potential disaster zones.

Furthermore, for all required materials and components, companies must determine the status of their lifecycles, from introduction to obsolescence. This is needed because in case of a disaster, companies may chose not to rebuild or repair a facility that produced marginal parts near the end of their lifecycles.

The next step for a company is to determine the risk profile of its supply chain by engaging the highest-risk suppliers and service providers first. Companies should require high-risk suppliers to document their mitigation plans for supporting their operations, and to show how critical suppliers and outsourced partners likewise will support them.

The next step for preparedness is creating a disaster-mitigation plan for the supply chain, which aims to reduce the negative effects of a disaster on a company's supply chain. Specifically, the plan prescribes a set of actions to be taken before and after a disaster in order to ensure continuity of supply.

One key aspect of a mitigation plan is to develop supplier standards that mandate new and existing suppliers to meet the requirement of having a disaster preparedness/business continuity plan. Companies should schedule regular quality audits of direct partners to better understand their total quality management philosophy and strategy, while also including disaster preparedness as part of this process. Furthermore, firms should carefully review any outsource plan to developing countries, in order to mitigate exposure to areas with lower safety standards that could be more easily affected by natural disasters.

Elements of a disaster mitigation plan can include the following:

  • Creating a second production site in a different location with less exposure to disasters
  • Creating a hot standby second production site that has been prequalified and can be ramped up quickly
  • Creating additional inventory storage hubs in different geographical locations
  • Maintaining higher on-hand days of inventory
  • Establishing qualified multi-mode and multi-route transport support

All mitigation plans have costs associated with them. These costs are paid directly either by the company itself, or indirectly by the company's supply chain. The cost of a mitigation plan depends on how much risk your company is willing to tolerate. However, the cost of not having such a plan — and being caught unprepared in a disaster — could be far greater.

10 comments on “How to Mitigate Supply Chain Disasters

  1. mfbertozzi
    January 6, 2012

    Well done Dale & Greg, present editorial, in my opinion, opens our mind toward a linear approach for facing several kind of disasters, as you have mentioned at the beginning. As of today, I believe we could consider a couple of additional condition, very crucial to address for supply chain: yes, weather condition for events such as earthquake are unpredictable, but it seems also what will happen across the globe, in the area of economy and financial aspects, are stronger than weather, to predict. Consider the number of big companies went in default in the past 15-20monthns, it seems there is no way to outline mitigation plans.

  2. bolaji ojo
    January 6, 2012

    Matteo, If only we could predict the likelihood and potential impact of natural disasters. This isn't always possible

    These aren't the only type of disasters businesses deal with, though. Many times the disaster is self-inflicted — wrong products, failed manufacturing systems, inaccurate demand-supply forecasting, poor decisions by management, etc. The industry may be troubled by natural disasters but it is equally impacted by problems inflicted upon it by management, the economy and society as a whole.

  3. Barbara Jorgensen
    January 6, 2012

    I wasn't aware of Fujitsu's preparation and that is a great example of how some foresight can save the day. Like fire drills, companies in quake zones should prepare and practice for such emergencies. It is a big task for something as big as a fab, but Fujitu's losses were greatly mitigated by its efforts. Thanks for the great information!

  4. mfbertozzi
    January 6, 2012

    I am convinced a big part of recent crucial disasters happened are about situtations you have mentioned, Bolaji. Recently, here at EBN, several editorials and posts have been focused on big companies such as RIM or HP and it appears, for them, light to follow is still far away. Anyway good to know from Dale & Greg what other companies are doing to prevent strong difficulties in supply chain.

  5. _hm
    January 7, 2012

    It is very good topic for disccusiion in Lessons to Learn. Can they simulate the disaster like event in supply chain to really evaluate how effective are their mitigation plans?

  6. mfbertozzi
    January 8, 2012

    @_hm: in fact, it could be an interesting path to follow; in the area of ICT, for instance, policies and disaster recovery sessions for simulate critical situation, are performed a few times per years, at least by team leading ICT corporations at major companies. Even a real end-to-end simulation for supply chain could be quite expensive, I believe specific software for simulating those conditions, could be right developed and could help a lot also in evaluating if disaster plan adopted needs some improvement or not.

  7. _hm
    January 8, 2012

    I wonder, but simple 12 to 18 months stock of few critical wafers will give equally good solution at lower cost. This will be very quite safe approach. Other critical parts and process needs to be taken care.

     

  8. itguyphil
    January 8, 2012

    You would think that in these times of advanced technologies and information, this would be a given. It always amazes me when such 'disasters' bring large organizations to their knees.

  9. mfbertozzi
    January 8, 2012

    In principle, I agree with you, neverless stocks to allow for checking how an adopted plan could really mitage impacts in case of disaster, require in a such way investments or some updates within financial statements, as the basis of criteria outlined by each local Gov. In my eyes, it appears much more complicated then a software processes' simulator.

  10. stochastic excursion
    January 9, 2012

    Risk management can often be sidelined by competitive cost pressure and replaced by wishful thinking.  In evaluating a supplier's track record when deciding on sourcing components,  companies should take into account the vendor's disaster risk profile.  A standardized risk profile along the lines described by this article would be useful industry-wide.

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