Fragile supply chains challenged by natural disasters

Symbolically iPad2 sale was delayed because 4 core parts could not be delivered from Japan in time. More seriously affected was the automobile sector. The production needed adjustment by maximum of 3 months simply because the essential parts suppliers, located northeast Japan, were brutally damaged. Likewise Thailand was flooded seriously in the last quarter of 2011 and many industrial zones could not simply operate. Hard disk was in short supply for a number of months because Thailand is the hub of such production. This flood revealed also that Sony and Nikon digital cameras are solely produced in Thailand and their latest models were forced to postpone their debut sale.

 

 

 

Efficiency vs. Safety

Manufacturing nowadays takes different forms, enabled by modern technology, low cost transportation, and de facto FTA. Module production makes it possible to separate production processes in different locations. All the processes used to be completed in the same location prior to this module production innovation. The labor intensive processes have been moved to labor rich and low wage countries. These modules can be brought together to the final assembly location. Typical example of such is the final assembly line of Hard Disk in Thailand. 

Supply chain production is basically very efficient; at the same time too much efficiency always sacrifices reliability and safety. If concentration of such core parts production does not occur in one particular area, the production interruption might be minor by natural disasters. If producers should hold parts sufficiently in inventory, their production will not be interrupted seriously either.

Although we cannot deny the fact that supply chain developments have produced the trend toward de facto FTA and maximum efficiency, which substantially lowers the price of final products, the efficiency incurs risks and uncertainties always.

 

3.11 East Japan Earthquake and Thailand Flood

Some automobile core parts makers stopped production due to the damages of the earthquake. What surprised us at the time was the fact that not only Japanese automobile manufacturers but also those in Thailand and the U.S. were affected because of the short supply of core parts from the earthquake-affected area. Not many people know that the northeast Japan is such an important area for core car parts production.

In the last quarter of 2011, the flooding attacked Thailand. The worst flooding in 70 years was seen in Ayutthaya, Pathum Thani, Nonthaburi, Samut Sakhon and parts of Bangkok. As many as seven industrial estates, 838 firms, and 380,000 labors were affected. Production of automobile and electric/electronics fell by almost 35%. These affected areas are a major source of intermediate input producers. 

As Toyota first introduced an efficient Kanban system, or “just-in-time” system, most of the world supply chain uses the same for final assembly. The disruptions of parts and components delivery inevitably had a strongly adverse effect on the non-flooded areas, both in Thailand and other countries.

Thailand provides low-cost assembly bases. The final products are exported. Automotive exports recorded the most severe decline, more than 50% decline in November 2011, followed by 48% of the electronics and 22% of the electrical appliances industries. 

Conclution: Reducing supply chain disruptions 

Since the supply chain disruptions affect the world substantially, we should consider the ways to reduce such disruptions. One such way is “Don’t put all the eggs in one basket.” In fact, some Japanese multinational manufacturers have already moved to locate core suppliers in two or more locations. This is the case of redundant suppliers. Alternatively, redundant inventory, although more costly, can buy safety and reliability for continuous operation to get away from “just-in-time” efficiency. When Japan encountered another great Hanshin Awaji Earthquake in 1991, the supply chain between East and West Japan was severed due to the collapse of high ways and railways. Redundancy approach has not been taken up and we have faced two major disasters in 2011. A slight move in this direction can be found in the breakup of subcontracting system but this is obviously not enough.

Quest of too much efficiency brought Japanese electronic giants such as Sony, Sharp, Panasonic record high losses in 2011.  With the strong competition from Korean Samsung and LG LCD TV prices are very low and Japanese manufacturers can produce only at a loss now. 

One bright aspect of the current supply chain disruption is the fact that Japan opened up the labor market for Thai skillful labors temporarily. Japanese multinationals have developed Thai human capitals to such an extent that production will not be completed without them. Long term vision of training labors and pride in manufacturing will save our quality of life from too much competition and quest for efficiency.  

 

 

 

Note: Shigeyuki Abe works for Doshisha University, Kyoto and Pongsak Hoontrakul for Sasin of Chulalongkorn University, Bangkok