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Tech Needs a Healthier Supply Chain, Part 1

Some natural disasters change history. The tragic March 11 earthquake and tsunami in Japan may well turn out to be one of them.

With luck, a much healthier and more soundly based electronics industry supply chain will emerge. We have long voiced concern over what we saw as the industry's offhandedness towards its business practices whereby, with ever increasing momentum, common sense and sound practice were being progressively cast aside for the sake of near-term profits or “increased shareholder value.”

Where once company presentations focused on vision, intellect, creativity, and new products, nowadays it seems metrics such as ROI, ROE, RONA, ETR, cashflow, and margin dominate the agendas. Of course profit and cashflow are important to long-term survival, but our unashamedly old-fashioned belief has always been these were diagnostic — they came from doing the job right and not by manipulating the balance sheet.

Business tricks include selling and leasing back assets, off-shoring, lean operations, and outsourcing everything and anything, reaching such monumental proportions that, with rare exceptions, the corporate tail is now wagging the dog, with the balance sheet driving the business and not the reverse.

We raised this issue in Future Horizons' monthly report feature, “The Broken Industry Model — Back to Business Basics,” and were prophesying then an industry-wide business model disaster waiting to happen. The supply chain mess the industry now finds itself in would have happened anyway; the earthquake and tsunami merely accelerated its arrival.

We wish that it had not been this way, not just because of the suffering in Japan, but because it has given executives and industry a messenger to blame rather than being forced to face up to its past bad decisions. We have always counseled about the semiconductor industry's strategic nature and the fact its impact stretches way beyond its $300 billion intrinsic value, ultimately driving 10 percent of world GDP.

What makes this situation even more important is the absolute uniqueness of every resource throughout the supply chain — from the raw materials used to the manufacturing equipment that turns the sand into ICs. Everything is special. That in turn means the electronics industry that makes end products out of ICs, as well as its customers and the system and service providers, all owe their existence and livelihood to an exclusive and near-term irreplaceable resource.

Yet, it was increasingly taken for granted — by the chip industry itself, where executives often claimed, “Wafer manufacturing is not a strategic competence, so outsource it”; and by the chip industry's customers who only cared about pricing and technology innovations. Customers' favorite question has become, “How much is your price today?”

Just-in-time, on-demand, lean, batch, and outsourced manufacturing models took over from inventory, work-in-progress, production lines, and multiple sourcing, despite the fact that the whole manufacturing process takes six months from wafer-build to end-product delivery.

Cracks first appeared last September when Nissan was forced to shut down car production due to a lack of engine management modules, itself the result of a shortage of ICs, despite the chip supplier's claim that it had made all the ICs originally asked for. Clearly no one was managing the overall supply chain; no one appreciated the long supply lead-times involved. We forecast in our January seminar that incidents like this were set to increase dramatically during the second half of this year, due to the fact the supply chain had been squeezed too far.

The earthquake and tsunami merely forced the industry's hand. Yet the industry still seems to be in denial; the real implications have yet to sink in, with the issues being treated more as a disaster recovery plan rather than the need to fundamentally rethink the supply chain model. Past squeezes on the supply chain, always adversarial in nature, have in many cases reduced the number of suppliers to just a few, deemed to be a desirable and natural result of the industry's maturity and consolidation.

This may well be true, but does it make it wise? Is it beneficial to the industry as a whole that so few can effectively determine the fate of up to 10 percent of the world’s GDP, should disaster — or even bad or monopolistic management — strike, especially when contingency planning and supply chain security are deemed irrelevant in the balance-sheet-driven world that the industry had boxed itself into?

In the second part of this blog, I will be further reviewing how events are likely to unfold from the Japan disaster and steps the electronics industry can take to repair and rebuild the supply chain to limit the impact of future problems.

6 comments on “Tech Needs a Healthier Supply Chain, Part 1

  1. Nemos
    April 14, 2011

    Very “strong” article and I hope to create deep thoughts to the readers.

    A kind request to all to re evaluates and re examines the electronics supply chain model, and the way things work. “treated more as a disaster recovery plan rather than the need to fundamentally rethink the supply chain model” It is in human nature the first reaction to choose the easy way to rebuild what we had already and trying to continue the existent busted model.

    (Filled with hope when I read such articles)

  2. itguyphil
    April 14, 2011

    Typically, in technology, they say it's better to take a step back and evaluate your position when there's crisis. It has also been said to be the best time to rebuild or restructure since there's only up to go from there.
    Unfortunately, most still revert back to theirold ways, since that's all they are familiar with.

  3. Anand
    April 14, 2011

    “it has given executives and industry a messenger to blame rather than being forced to face up to its past bad decisions”

    Malcolm,

    Great article. Are you suggesting this time also the industry will not learn lesson from this ?  I guess its high time that the executives should stop blaming and start finding some solution.

  4. saranyatil
    April 15, 2011

    IC's being the most integral part of any system, from the Japan disaster many executives are facing a lot of problems, my companies executives were struggling to arrive at a solution to improve the supply chain issues and they have reached a saturated state since its taking them huge amount of time to cater to needs of the industry. for now they are evaluating different semiconductor manufactures around the world.

  5. Ariella
    April 15, 2011

    Unfortunately, most still revert back to their old ways, since that's all they are familiar with.”  pocharles, that is so true. I've hear that insanity is defined as repeating the same action in the hope of getting different results. Many of us fall into insanity in refusing to break out  of patterns that are counter-productive.

  6. itguyphil
    April 15, 2011

    I listen to a sports radio show here in NY and the host has a common theme for sports and life in general:

    “People fear change”

    It's the single most significant psychological cause of many of the problems we as humans face. If we just took a moment to say to ourselves:

    “Is what I'm doing best? If not, how can I adjust to work towards a solution?”.

    Many of the world's 'problems' would sort themselves out rather simplistically. The  technology realm is just a larger microcosm of this point.

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