Late last night, while monitoring Twitter, we picked-up on breaking news “tweets” reporting that a major 6.1 magnitude earthquake had occurred in the vicinity of central Taiwan.  While earthquakes often occur in this region, a strong tremor that occurs at a shallow depth can be a cause for considerable concern. Knowing that this area in the epicenter for high tech and consumer electronics supply chains, we immediately re-tweeted this news with hopes that our readers would be on-alert to both the event and the potential for disruption.

Fortunately, for those residing in the impacted area, damage was reported as minimal.  Tragically, one fatality occurred along with some injuries. As we pen this commentary, there is a report that a number of large production facilities had to be quickly evacuated.  They include two separate facilities operated by the world’s largest semiconductor fab producer, Taiwan Semiconductor Manufacturing Company (TSMC), but according to the company, no interruption in production schedules is expected.  Three other companies with operations in Taiwan–chipmaker United Microelectronics, flat-panel maker Innolux, and liquid crystal display manufacturer AU Optronics each indicated in public statements to Bloomberg that they expected no impact from the quake.

These names, along with others, should be very familiar to our readers since they are each key strategic partners to large and smaller global high tech OEM’s. Any disruption involving any of these suppliers would probably have a significant supply chain impact without a supply chain risk mitigation plan.

Earlier this month, we were alerted to a startling report from Japanese media. A Japanese government panel predicts that if a magnitude 9.1 earthquake, similar to the size of the quake that struck the northern coastal region in 2011, were to hit off the southern coast of Japan, it could cause upwards of $2.3 trillion in economic damages, ten times the economic impact of the 2011 Great East Japan Earthquake.  That would equate to 40 percent of Japan’s current GDP. This estimate regarding a worst-case scenario is sensitive because of a long-expected quake potentially occurring along the Nanki Trough, a roughly 4 kilometer deep depression on the seabed that extends from Suruga Bay to areas off eastern Kyushu.

Think for a moment about what occurred in 2011, and the impacts incurred on aerospace, automotive, high tech, industrial and other supply chains. The impact to supply and brands was enormous and far-reaching.

These are all timely reminders of the realities of supply chain related risk, and the critical importance for having active supply chain risk mitigation and business continuity processes.

What’s the status in your organization?

Bob Ferrari

Added Note: This author will be speaking on this timely topic at an upcoming monthly meeting of the Central Pennsylvania APICS organization in Harrisburg Pennsylvania on Wednesday, April 17. The meeting will be held at the Holiday Inn Harrisburg East beginning at 5:30pm.  For further information and registration, please email registration <at> apics-cp <dot> org.

From time to time, Supply Chain Matters will call attention to reports or articles which we feel should definitely be included in your reading list, especially when it concerns small to mid-sized supplier businesses.  This commentary references an article worthy of both a good read and reflection on how component suppliers can demonstrate industry diversification in supply chain support strategies.

Today’s edition of The Wall Street Journal features the article: Meet the Smartphone Arms Dealers. (paid subscription or free metered view) This article describes the efforts of two Japan based suppliers, Murata and TDK, both of which have managed to successfully leverage continuous product innovation and industry targeted support toward business excellence. While Japan’s major electronics OEM’s have fallen on difficult business times, these two suppliers are performing very well. In terms of overall business and financial performance, the WSJ reports that both of these suppliers posted profits for the first nine months of their fiscal year’s, fueled by healthy demand for products.

Murata is one of the largest providers of ceramic capacitors and wireless communications modules. TDK is a leading global supplier of electronic inductors.  The WSJ points out that both suppliers have been able to maintain dominance in the electronic circuits’ area by keeping R&D and leading-edge production in-house. Each further designs and builds the manufacturing equipment used at their factories, maintaining a manufacturing process edge. A Murata senior executive is quoted as indicating that one always needs to be one or two steps ahead of the competition.

In the 80’s and 90’s when Japanese electronics OEM’s dominated the global market, the customers of Murata and TDK were domestic. According to the WSJ, today Japanese customers amount to little more than 20 percent. Both suppliers have reached out to supply components to major smartphone and electronic tablet OEM’s including the lucrative supply chains of both Apple and Samsung. Both suppliers are working on longer-term efforts towards expanding their diversified industry presence. TDK is focusing on components utilized in electric and hybrid automobiles along with energy distribution systems for buildings. With a trend for more and more electronic circuits used within cars and trucks, Murata is building a presence in that industry.

Upon reading this article, we thought of the past history of U.S. automotive supply chains in terms of Tier 1 and other component suppliers.  At one time, the big three OEM’s owned their own Tier 1 component suppliers, and later under severe financial stress, were forced to spin them off as independent companies owned by various outside investors. During the severe recession of 2008-2009, when the market tanked, the ripple effect impacted U.S. automotive suppliers quite heavily.  Some diversified in supplying adjacent industries or non U.S. OEM brands such as Toyota or Honda. Others were unfortunately forced to be acquired, some by non-U.S. interests also seeking product innovation or market diversification.  That was the initial entry of China based suppliers into U.S. automotive supply chains. Some smaller suppliers unfortunately perished, running out of options.

In 2008-2009 we were publishing commentaries highlighting successful product innovation and diversification strategies as a means to share learning. We therefore remain much attuned toward highlighting successful efforts of component suppliers in practicing sound business and diversification in supply chain support strategies.

Understand and learn from others.

Bob Ferrari

Supply Chain Matters has often pointed out increasing occurrences where the impacts of supply chain strategy and initiatives contribute to either positive or not-so-positive financial media news stories influencing a company’s value to shareholders. The significance of efforts to simplify a supply chain supporting unusually large assortment of products with a corresponding complex global supply chain is indeed newsworthy.

Last Thursday, The Wall Street Journal headlined a rather positive story related to industrial manufacturer 3M Company, and its efforts to untangle “hairballs” across its global product supply chains (paid subscription or free metered view).  The 3M supply chain has responsibility to plan, produce and distribute over 65,000 products ranging from tape, solar energy panels, dental braces and dog chews.  The company has 214 plants located in 41 countries with nearly two-thirds of current sales originating outside of the U.S… With a continued challenged global economic climate and overall sales growth at just over 2.4 percent, 3M had no choice but to focus on cost control and efficiency as a continued source of profitability.

In the article the 3M corporate culture is described as risk-averse, leading to a philosophy of “make a little, sell a little”, meaning do not make hard commitments to capital and capacity until a product has proved itself to be a market winner. That philosophy drove product developers to seek out any available supplier expertise and capacity, regardless of ultimate product distribution strategy, even if certain sub-component suppliers were hundreds of miles distant from other upstream value-chain suppliers.  The result was what 3M ex-CEO described as “hairballs”, value-chains that extended across multiple suppliers in multiple geographic areas, all adding to transportation and logistics costs.

Sound familiar?

3M has now embarked on a three-pronged supply chain strategy addressing simplification.  The first is to have production located closer to customers.  With two-thirds of revenue outside of the U.S. the implication is for a more international based production capability.

Second is the need for fewer, larger, more efficient “super-hubs”, plants capable of making large numbers of products. These hubs can also customize products to the needs of local markets. Ten of these hubs have been implemented with six additional planned.  Ten of the total sixteen “super hubs’ will be outside of the U.S.

The third area of focus is overall efficiency which includes reduction in cycle times from order of raw materials to delivery of finished goods.  As an example, the production of 3M brand Command Hooks was reported to be reduced from 100 days to 35, which is a considerable impact. Similarly, the cycle time for 3M’s Littmann stethoscopes will be reduced to 50 days from 165.

Between the lines, readers can discern that 3M shifted its supply chain strategy from one of total focus on efficiency and cost to that of time-to-market balanced with an overall supply chain flexibility and efficiency.

In the Gartner 2011 last listing of Top Twenty Five supply chains, 3M was listed at number 24.  Perhaps at this week’s unveiling of the 2012 listing, 3M will advance.  In any case, 3M provides another example of supply chain strategy and response that has a positive impact on business outcomes and performance.  Perhaps the next emphasis will be on a reduction of overall product portfolio.

Bob Ferrari