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Japan Disaster Rewrites Book for Manufacturing Risk Management

While most of the global outsourced electronics manufacturing business has little direct exposure to the situation in Japan, the disaster is likely to have a long-term impact on how companies in this market assess supply-chain risk, IHS iSuppli research indicates.

In one of the most far-reaching developments, as much as 25 percent of silicon wafers used for semiconductor manufacturing was taken offline by the quake, IHS has noted. Already, several large component suppliers have stated that facilities near the epicenter likely will remain inoperative for weeks — and in some cases, months.

Outside of Japan, the global automotive industry is among the first to shutter plants due to shortages of key components. Given Japan's prominence in both finished components as well as major raw materials, it is very possible that further shutdowns of unknown duration will follow in other industries. Supply chains — as the name implies — are really a series of interlinked operations that only function well when all connections remain intact. Clearly, many of those connections are not functioning the same way they did only a few short weeks ago, before the disaster.

To date, many companies across the outsourced electronics manufacturing industry may have suffered little direct impact from the Japanese disaster. However, indirect effects are expected to make their presence felt because of Japan's high market share in components such as memory chips, laminates, capacitors, and rechargeable batteries, to name just a few.

Comments from electronics manufacturing service (EMS) and original design manufacturing (ODM) providers indicate that the near-term supply of components is generally intact, with existing stocks in the range of one to three months. However, looking out further into the future presents many questions that cannot be answered at this point.

For now, the day-in, day-out procurement process has attained an intense level of activity not seen in some time. And in what seems like a ritual of daily calibration, end customers, EMS and ODM providers, as well as component suppliers are all working to sort through even more volatile daily changes in component availability.

But as Japan begins to rebuild after the cleanup and the renovation process ends, supply and local demand will rebound. For the global electronics supply chain, planning for the long term now must account for future major events, IHS believes, which will have an impact much further upstream.

No longer will the stress test of the supply chain simply evaluate component suppliers, distributors, and other near- or long-term issues associated with quality, capacity, and financial viability. Instead, companies must look even deeper into the “suppliers of the suppliers” as to where raw components are manufactured, in order to add another level of risk assessment.

To be sure, the near term remains highly uncertain, and panic buying may ensue because of non-linear supply availability. Just the same, recovery from the tragedy is bound to follow, IHS believes, and Japan will remain a major component of the global supply chain.

— Thomas Dinges is the EMS and ODM analyst at the market research firm IHS iSuppli in El Segundo, Calif. For more information on the contract manufacturing market, see Dinges’s new report, “EMS and ODM See Near-Term Pause on Road to Recovery.” For media inquiries on this article, contact Jonathan Cassell, editorial director and manager of public relations, at jonathan.casell@ihs.com. For non-media inquiries, please contact .

6 comments on “Japan Disaster Rewrites Book for Manufacturing Risk Management

  1. Anand
    April 12, 2011

    “as much as 25 percent of silicon wafers used for semiconductor manufacturing was taken offline by the quake”

    Thomas,

      25% is huge percentage. How long do you think its needed to bring back these supplies to normal. And according to you, by what amount this will affect the prices of  memory chips, laminates, capacitors, and rechargeable batteries.

  2. Anna Young
    April 12, 2011

    Anandvy, you're right the prices of memory chips, laminates, capacitors and rechargeable batteries are bound to be profoundly high as result of the current situation affecting supplies. This is normal in a situation of this kind, where supply is less than demand.

    However my concern is the possibility of further shutdowns in other industries, and the impact this may have on businesses locally and globally.

     

  3. Jay_Bond
    April 13, 2011

    Anna, you make a good point about the other industries feeling the effects. While the prices of the components are likely to rise in the short term until supplies can return to normal, most of the population won't feel these effects drastically. However, the automotive business is going to feel it. The supply chain runs deep through Japan. Some things as simple as pigments for automotive paints won't be available. As the cost of gas has risen drastically over the last few weeks, more people are going to look at buying better fuel efficient vehicles. Many of these cars won't be available. That in turn affects many local economies. Dealers who don't have inventory to sell, and consumers who now need to spend more on fuel and a lot less on everyday items. This could trickle down to the electronics segment since many people will put off buying expensive electronics.

  4. tioluwa
    April 13, 2011

    I'm new to the whole supply chain thing, but i can't help but wonder:

    Is the electronics supply Chain that inflexible?

    yes 25% is lost so to speak, isn't there any level of tolerence that can cater for this lost beyond the level of goods in stock?

    I feel that the supply chain will have to evolve to manage this crisis if it lingers beyond a few months, and stock runs out. The electronics supply chain is too critical to the entire world for it to be shut down.

    How flexible is the supply chain?

  5. eemom
    April 13, 2011

    This definitely points to a substantial weakness in the supply chain that wasn't previously seen.  The level of destruction in Japan causing 25% loss in wafer supply caused a shortage that no one expected or even thought to plan for.  Where companies were trying to establish strong long term relationship with suppliers, they must now have a strategy of utilizing multiple suppliers in order to minimize their risk.  Also, we will hopefully come out of this with a stronger supply chain that is diversified across many geographical areas.

  6. elctrnx_lyf
    April 20, 2011

    Certainly the earthquake and Tsunami in Japan have tested the complete strength of the elctronic component supply chain. As we know many big automotive companies have shut the manufacturing due to the shortage of the major elctronic subsystems. But I don't think is is possible for OEM to look into the supllier of the suppliers to actually estomate the risk. Japan is at the epicenter for disasters and many companies might try to pull off and invest in a better geographical favoured locations.

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