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Japan Quake: Tenor Shifts as Industry Enters Week 2

There is more of a sense of urgency in the electronics supply chain as the industry enters the second week following the March 11 earthquake. The ongoing uncertainty over factories' ability to operate with rolling blackouts is fueling fears that the quake is not merely a short-term disruption in the supply chain.

Electronics distributors — which are talking to both their component suppliers and OEM customers — report that companies are still seeking information that will help manage demand.

“Last week our larger customers were setting up conference calls so they could understand how much inventory we had,” says Michael Knight, vice president for corporate marketing and product management for TTI. “This week, we are hearing from small and midsized companies that maybe didn't have the resources last week to be proactive — this week is definitely busier than last week.”

Among the issues being raised this week is the nature of the electronics supply chain itself. The electronics industry has increasingly been moving toward just-in-time deliveries and lean inventory management, which means few companies actually own and hold inventory. Even distributors, basically the warehouses of the supply chain, don't necessarily stock every component that's on order. Depending on leadtimes, ordered parts may not actually hit the warehouse until the OEM is close to taking delivery. At the moment, a portion of distributors' orders are placed with factories that have shut down because of the quake.

Catalogue distributors, which specialize is small-volume orders, are also hearing from companies concerned about production-level inventory. Catalogue distributors stock every component they say is available, but not in production-level volumes. So OEMs that aren't sure they are going to get everything they need are checking with catalogue distributors on availability.

What this all boils down to, suggest several industry experts, is that the supply chain is more of a concept than a reality. Forecasts and open orders aren't any good if products are not available for shipment.

“People have lost touch with the real supply chain dynamics — even big firms [like Nissan last year],” says Malcolm Penn, president and CEO of market research/analyst firm Future Horizons. Penn in the past has questioned the fab model of the semiconductor supply chain. “Deluded by just-in-time, they forget its six months from wafer schedule to module in the car. Plus, everyone outsources everything to everyone with no one taking care of the whole chain. This is the fallacy of outsourcing: There is no security of supply.”

TTI's Knight says that even if you are able to communicate with your suppliers, they have a supply chain that could be in jeopardy. “The further back you get [in the supply chain], the harder it is. Let's say you are looking for information about materials — it's all sketchy and incomplete.”

Penn says the supply chain is not as diverse as everyone thinks. “On paper, it looks that way. But when you peel back the onion you start to see lots of mega-dependencies on one or two key suppliers. Real supply chain management would sort this out. When was the last time anyone did a 'what if' scenario?”

It's possible nobody could have envisioned the scenario that's currently facing Japan. But now that we are experiencing it, isn't it time we reexamined some commonly held beliefs? For example, on a balance sheet, a high level of inventory isn't a good thing, even for distributors. Yet, it's inventory-heavy companies that are going to benefit as supply is disrupted and prices increase. Will the financial community reward these companies for this foresight?

If so, it won't last — an inventory buildup will come back to haunt the supply chain. But “just-in-time” and “lean” are only great concepts until the unthinkable happens. It might be time to revisit some of those concepts.

16 comments on “Japan Quake: Tenor Shifts as Industry Enters Week 2

  1. Taimoor Zubar
    March 23, 2011

    Companies cannot afford to keep their capital tied up in huge amounts of inventory. On the other hand, in disaster situations like these, they need to prevent any disruptions in the supply chain and need to keep their output intact. I think they will have to follow a hybrid approach in this case. While sticking to JIT principles, they should also have alternate sources of supply with them. For instance, rather than procuring from a single Japanese supplier, companies can also stay in touch with suppliers in Taiwan, China etc. In incidents like the tsunami, the alternate suppliers can fill up the gap. This would ensure that companies can keep the forward supply chain smooth in all cases.

  2. Ashu001
    March 23, 2011

    Barbara,

    The Sheer Irony of your Post had me smiling like crazy…

    Especially these words here,

    “Deluded by just-in-time, they forget its six months from wafer schedule to module in the car. Plus, everyone outsources everything to everyone with no one taking care of the whole chain. This is the fallacy of outsourcing: There is no security of supply.

    So true and so totally to the point you are!!!

    Wish atleast some Senior Company Execs had shown foresight to go into the security of the entire Supply Chain.Unfortunately thats a topic for another day,

    I guess…

    Unfortunatly everybody today is just too short-sighted and super-greedy.Nobody cares about the Long-term consequences of their actions.

    Regards

    Ashish.

  3. Barbara Jorgensen
    March 23, 2011

    Hi Tech4–I must give credit where it is due–Malcolm Penn actually said that on our Live Chat today, but I agree with him. The supply chain is about moving pieces and parts around to where they are needed. Financial presure is what has been moving companies to JIT and lean, and it's not always in the best interest of the end-customer.

    On the flip side, our readers have a good point–a lot of capital is tied up in inventory, so the less, the better. It all works well until something like this comes along.

  4. Ms. Daisy
    March 23, 2011

    Regarding the longterm consequences of the quake and its aftermath – nuclear reactor melt down, I worry about the haste by Japanese suppliers to get the needed electronic supplies back into the market without making sure that they check for radioactive dusts that may have been spread from the damaged nuclear plant to these factories. Let us face it, the ports in the states are not able to pick up on contaminated goods of the manignitude that we are faced with.

    I don't believe the Japanese government is able to monitor exports for radioactivity at this time, considering the amount of human suffering and loss that they are faced with. The short-term consequence for the supply chain is worrisome and the longterm prospect is bleak even if the electricity is restored. Hopefully, procurement managers that have diversified their suppliers can benefit from longterm relationships and keep their production going.

  5. Mr. Roques
    March 23, 2011

    Can you really plan for the unthinkable? Japan know's it is prone to major earthquakes (and it builds buildings accordingly) but they can't extend that planning to every process they run.

    Do you think China, Korea and Taiwan will take advantage of the situation to try to take Japan's clients?

  6. Adeniji Kayode
    March 24, 2011

    I agree with you Mr. Roques.

    I think we should expect to see more from China,Korea and Taiwan,making every effort to gain more grounds in the Market. 

  7. Ashu001
    March 24, 2011

    Mr.Roques,

    Actually speaking Japan could have planned better to deal with this tragedy.

    More and more information is leaking out that there was tremendous fraud involved in designing the nuclear reactors.

    http://www.bloomberg.com/news/2011-03-23/fukushima-engineer-says-he-covered-up-flaw-at-shut-reactor.html

    So what do we do now? can we trust the hundreds of reactors that are operational today all across the Western world? Or do we start inspections on each and every one of them? What about the hundreds that are now on the drawing board all across Asia??

    Too many questions not enough clear-cut answers.

    Regards

    Ashish.

  8. tioluwa
    March 24, 2011

    the impact of this tragedy is again amazingly enormous.

    Yes in more than we think, Japan and everyone who has suffered a lost business wise could have done a little mroe to avoid this, but as we all know, it generally takes a scene like this to drive the point home.

    My concern is weather or not these companies that have been temporarily shut down by the disaster will be able to make it back to the height from which they have droped. Adeniji has a point, others are most like going to seize the opportunity to have an edge in the market.

    I hope proper measures will be put in place in other areas of the supply chain, who knows what will hit next and what impact it will have on global markets.

  9. prabhakar_deosthali
    March 29, 2011

    The current situation in Japan is unprecedented but not totally unexpected. The Earthquake itself would have been manageable but the nuclear disaster has added another dimension to the whole situation. The effects of radiation and power shortage are going to be long term. All manufacturing companies dependent on Japan for component supply have to look elsewhere in the long term. Even the Japanese component manufacturers will have to  think of shifting some of their plants to other parts of the world , and thus distributing their risk in the future.

  10. Backorder
    March 30, 2011

    Whatever happened has happened, and it was a human tragedy. In hindsight, we will find flaws, but the absolute positive that will come out of this nuclear crisis is that it will result in much more scrutiny of the nuclear power industry. I dont care if the fixed costs for nuclear power increase, security can not be compromised and if it impossible to ensure, let us give it more time. Radiation disasters are a terrible terrible eventuality. Must be avoided at all costs. Drop new projects, shut existing, all that is required must give.

  11. Mr. Roques
    May 10, 2011

    We'll have to wait and see. The nuclear issues continue to give Japan headaches but I haven't seen any major moves by the big companies.

  12. Mr. Roques
    May 11, 2011

    Well, yes… but the reactors, in cases like this, are bound to fail. They're not supposed to but heck, it was one of the biggest earthquakes in history (measured). 

    I have no clue how the Western World will deal with their own reactors. What do you suggest? — when even the oil rigs have serious issues.

  13. Ashu001
    May 12, 2011

    Mr Roques,

    The article below clearly indicates the shortcomings involved in Planning of the entire Nuclear reactor in Japan(especially where corners,etc were cut and cut dramatically).

    I suggest we move to Energy conservation ASAP.

    The West(especially America) still thinks Energy is dirt-cheap so continues to waste it on inefficent technologies and infrastructure.

    I don't remember where exactly but I had seen a very good study which talked about Energy conservation and how it can actually cut our Fuel bills(as well as Crude Oil) dramatically.One particular case involved High Quality Insulation(in Areas most affected by strong winters as well as strong summers).

    Regards

    Ashish.

  14. Mr. Roques
    June 15, 2011

    Hello Ashish,

    You make a very valid point although it's been proven (through history) that people won't change their actions until it's veeery close to failing (and slowly when it becomes illegal).

    I can think of horses in the 1900s, specially in the city of NY … 1) killed more people (in %) than cars do today 2) the city was literally filled with it's manure (at least a feet) and when it rained, yewk! 3) people got very sick because of that manure mixing with water, food, etc.

    A few years later… the car!

  15. Ashu001
    June 16, 2011

    Mr.Roques,

    You are talking about basic human pschyology.Nobody likes to change by themselves.

    They have to be forced/coaxed/cajoled by some external catalyst.

    And usually that catalyst after things have gone from Good to Bad to Worse to Worst!!!!

    Regards

    Ashish.

  16. Mr. Roques
    July 18, 2011

    Exactly but my point is that seems somehow have a way of working themselves out.

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