Just about a month ago, an earthquake that registered 6.4 on the Richter Scale shook Tainan in Southern Taiwan, a hub for many global electronics OEMs. Now, however, the quake remains a talking point for global electronics OEMs who are hoping to leverage the event as a cautionary tale for risk planning.
“These events always seem to catch people by surprise but the surprise might be lessening,” Eric Jones, vice president and global manager of Business Risk Consulting (BRC) at global insurance company FM Global told EBN in an interview. “Companies, particularly those who depend on suppliers in that part of the world, are getting more savvy and aggressive in trying to manage these risks.”
Early reports put the death toll of the earthquake at several dozen, with hundreds of people still missing. The weeks following, stories of supply chain disruptions have been added to the tales of woe. “Facilities for Taiwan Semiconductor Manufacturing (TSMC), Apple's sole supplier for the A10 processor integral to its forthcoming iPhone 7, were impacted,” Forbes reported. “Fortunately stocks of delicate wafers, which are central to semiconductor production, survived relatively unscathed and only 1% of deliveries were expected to be disrupted. But some orders face delays of 10 – 50 days.”
The story doesn't end there, since supply chain disruptions have a ripple effect that can last days and even months. “While initial reports of the quake emphasized minimal damage and interruption to the major chip foundries concentrated in southern Taiwan, there are less apparent global supply chain impacts that will likely be felt in the near future,” Resilinc wrote in its February 2016 report titled Case Study: 2016 Taiwan Earthquake, Assessing the Foreseeable Supply Chain Impact.
Taiwan delivers a huge number of semiconductors and integrated circuits (ICs) to OEMs around the world. And the country is earthquake prone. In 2014, the worldwide semiconductor foundry market grew 16.1% to reach $46.9 billion in revenue, according to market research firm Gartner. Two Taiwanese chipmakers, Taiwan Semiconductor Manufacturing Corporation (TSMC) and United Microelectronics Corporation (UMC), account for 63.6% of that total. In addition to the most recent earthquake, another earthquake in 1999 in the region put DRAMs in short supply and increased prices substantially.
The combination of semiconductor manufacturing and earthquakes offers a unique recipe for disaster. “Considering it requires billions of dollars to simply establish a chip fab, it is understandable how even a brief shutdown and no idle capacity can cost the plant millions of dollars to recalibrate, potentially affecting future shipments,” the Resilinc report explained.
TSMC, for example, estimated that one percent or less of it's Q1 shipments would be affected by the event, a company report said. It sounds minimal, but real numbers tell a different story. “It is important to recognize that even 1% of TSMC's revenue is a very large number and can have deeper supply chain ramifications and result in shipment delays beyond its Q1,” Resilinc said in its report. “Since TSMC's annual revenue is approximately $50 billion (2014), the company's quarterly revenue is around $12.5 billion. Therefore, 1% of that quarterly revenue amounts to a significant $125 million.” That is just one of dozens of companies that may have been impacted—the total impact is much larger.
Resilinc and FM Global offer some suggestions on mitigating potential risk from the recent earthquake:
- Understand that there is competition for available inventory and capacity in the wake of the disaster.
- Remember that there will be unusual competition for all kinds of resources including inventory, capacity, and freight movements.
- Move quickly and decisively to respond to potential disruption, working closely with contract manufacturers and hubs to claim inventory. “There is often still inventory to be had, so it's important to seize control,” Jones said. Especially for small and mid-sized organizations, which have less clout with suppliers, early action is critical, he added
- Assume resources are in short supply. Causes can be numerous, including Lunar New Year celebrations (offset by early build ahead as well as cleanup, recalibration, and recovery operations.
- Create a map to determine which sites, products, parts, and materials are derived from southern Taiwan and which may be impacted by the quake. This should be a coordinated effort from around the organization, Jones added. “You need to quantify and understand risk so you can figure out how much to spend and how to prioritize on risk mitigation in various areas,” he said.
- Monitor by creating alerts for related impact updates.
- Focus on good, clear, consistant communciation. Contact suppliers to create a replenishment program, and collaborate to mitigate risk, Resilinc suggested. Drill as deep into the supply chain as possible, to understand the potential risk in tier two and three relationships as well, said Jones.
- Think about the future and put supply chain risk management (SCRM) and resiliency strategies and program initiatives in place. “This includes people processes and technologies for (1) proactive risk identification, quantification and prioritization an (2) rapid crisis detection and response via 24×7 global event monitoring and analysis services,” Resilinc said.
Although people and processes have often been a focus of many organizations, technology is becoming even more important. Organizations should consider how enterprise technology can enhance a risk mitigation strategy. “I'm seeing an uptake in more sophisticated software packages that allow better insight and monitoring of these types of events in real time,” Jones said. “Winners and losers are separated by who is able to know about it and respond quickest.”
As important as smart risk planning is today, it will only get more critical in the future. “We are seeing companies start to get head around idea that you can't wait until tomorrow to get ready, the windows to react are tight,” said Jones. “That margin for error or margin for opportunity will get smaller and smaller as people get better at risk management.”
— Hailey Lynne McKeefry, Editor in Chief, EBN