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Tech Needs a Healthier Supply Chain, Part 2

In the first part of this article, I suggested that the Japan earthquake could be the catalyst the electronics industry needs to overhaul and improve its supply chain. (See: Tech Needs a Healthier Supply Chain, Part 1.) In this second and concluding part, I will look at how the industry arrived at its current situation — and why major steps must be taken to improve it.

Right now, there is enough work-in-progress inventory and other parts for firms to muddle through. But by the end of April, those parts will have been exhausted. Theoretically, companies have some breathing room to secure alternative suppliers, but this will be easier said than done, given the fact that all sectors of the supply chain were working flat-out, with little spare capacity, before the Japan disaster.

A shortage-driven run on components will deplete the inventory much more quickly. Restarting Japanese production has been made worse by the fact that even factories that weren't directly hit are struggling to maintain their pre-earthquake production levels due to power shortages, rolling blackouts, infrastructure difficulties, and making sure employees have enough food to eat and enough fuel to get to work.

Full-shift operation is impossible right now, especially at Japan's crystal pulling and wafer fab plants. If you cannot pull the crystals to make the wafers, which requires 48 hours of uninterrupted power, then you cannot feed the wafer fabs. This will mean an ongoing period of supply shortage hitting home in two to three months' time. The wafer shortage will affect every fab in the world, not just those in Japan, as will shortages of plastics and other materials used in the back end processing.

Assuming things get back to normal by the June-July time frame, it will then take three months for normal supplies to resume. That means the IC shipment business will return to normal operations in the fourth quarter at the earliest (minus the output from any factories that were damaged beyond repair).

We have already seen OEM plant closures as a result of problems with getting supplies; this situation is likely to worsen as the slow process of recovery begins. Fabs need power — lots of it, and at a reliable flow — and no one is going to risk restarting a fab or wafer plant until supplies can be relied upon. With 40 percent and 22 percent of global wafer production and wafer processing, respectively, done in Japan, and with no spare capacity, there is zero chance for this slack to be taken up elsewhere, even once problems with securing raw materials, shipping product, and employee absences are resolved.

So much, then, for the “wafers-are-not-strategic” school of thought punted by the IDMs going fabless (or fab-lite), and the OEMs switching chip suppliers at the drop of a price reduction. So much, too, for a world where supply chain security played second fiddle to balance sheet gerrymandering.

Outsourcing everything — like cheap debt — looks great on the balance sheet. That's often the only reason why it's done — not because it delivers better customer service. Outsourcing is also dangerously superficial. So long as everything works okay, outsourcing seems like the right thing to be doing. But when something goes wrong, the effects are potentially catastrophic, made worse by the fact no one really has any contingency planning any more.

Big companies will fail or be radically restructured as a result of the Japan tragedy. The crisis probably won't bring down whole countries, but it might make governments rethink their strategic dependencies, just as they did with oil in the post-war years. The European Commission is investigating the Key Enabling Technologies (KET), such as micro- and nano-electronics, that will drive the development of goods and services in the future.

9 comments on “Tech Needs a Healthier Supply Chain, Part 2

  1. Eldredge
    April 16, 2011

    I wonder how many companies or individuals factored this into their strategic planning.

  2. SunitaT
    April 17, 2011

    “made worse by the fact no one really has any contingency planning any more.”

    Malcolm,

      Why can't companies rely on mutliple outsourcing partners rather than single. This will diversify the supply-chain base and will help the company to cope up  catastrophe.

  3. Ariella
    April 17, 2011

     But when something goes wrong, the effects are potentially catastrophic, made worse by the fact no one really has any contingency planning any more.

     I do wonder about that. So many businesses seem to operate on the premise that they will be operating in the best of all possible worlds in which nothing can go wrong. Then when something goes wrong, as is almost inevitable, they have no idea what to do. Had they planned for it, they would have had to deal with a minor glitch, but as so many do not they are stymied. Then everything has to grind to a halt as they search for a solution. Business managers would do well to memorize Murphy's law, not in a fatalistic way, but to bear in mind what to plan for. 

  4. prabhakar_deosthali
    April 18, 2011

    The disasters of such a magnitude, as what has happened in Japan, come once in a lifetime and generally may not be repetitive. Next time a totally unseen-before disaster may strike a totally unexpected region of the world. All businesses are run with some kind of a risk with some reasonable backup measures. But when unprecedented events occur the businesses all around are going to be thrown out of gear.  The amount of overhead all the backup systems required to cover such disasters will be enormous and a normal business cannot afford it.  It is like when we walk out of the house everyday for work, the possibility of metting accident on the road is enormous but we take that risk and move on. We only take adequate precautions but cannot afford to take into account all the possibilities .

    So we have to stop  getting unduely paranoid about the failure of some of the businesses becaue of the unprecedented event that happened in Japan. Some of lessons would be however worth taking into consideration while planning in the future – be it a supply chain strategy, distributed manufacturing  or outsourcing.

  5. Taimoor Zubar
    April 18, 2011

    @Tirlapur: That's exactly what I had thought while reading through the disruptions in electronic supply chain caused by the quake. Japan may be the leader in electronic component manufacturing, but it's not the sole production center. Countries like China and Hong Kong have similar facilities for production. I think OEMs will have to rethink their strategy and instead of trusting one outsourcing partner, they may consider having multiple partners to minimize the risk.

  6. will c
    April 18, 2011

    @multiple sourcing idea. This is a good idea for contingency planning, but likely adds cost in terms of another entity to manage and a new problem in part equivalency.

    From this article, the main problem is power generation. Maybe suppliers should be required to have generators.

  7. tioluwa
    April 18, 2011

    I think TaimoorZ's point holds one of the gretest lessons of this tragedy for the supply chain. Too much depends on Japan, that is why the loss is so great, just as so much is depending on China now.

    the supply chain really needs to spread out, the prevent a such an occurence as this from happening again.

    Are there major factors hindering this from happening?

  8. prabhakar_deosthali
    April 19, 2011

    I just read in a recent report that  more than 60% of the wafer foundry business is concentrated in Earth-quake prone areas – Japan and Taiwan. That is a RED ALERT for the electronics industru worldwide as the foundries are the backbone of Electronics manufacturing.  USA and Europe have a very nominal share of the current Wafer fabs. These nations have to take this fact seriously and put in capital investments now to correct this huge imbalance in the supply chain. Foundries like TSMC and UMC must make effort to distribute their fabs outside the seismic zone to avoid repetition of what has happened in Japan.

  9. Malcolm Penn
    April 19, 2011

    “Are there major factors hindering this happening?”  YES!  Wall Street's and CFO/CEO greed; all in the name of “increasing shareholder value” … little wonder that the capitalist business model has become so discredited.  This is not capitalism but a cynical distortion for vested self interests.  It is time for companies to start running their buisinesses properly with the business driving the balance sheet not the other way around.  Time too for greed and poor management to become as socially unacceptable as racism and drunk driving.

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