We call Supply Chain Matters reader attention to a recent posting on Insurance Networking News regarding the Top 10 U.S. Business Risks for 2014. The report highlights findings from insurance provider Allianz and its Allianz Risk Barometer report, a survey among 400 corporate insurance experts from 33 countries.
Readers will recall that in Prediction Seven of our 2014 Predictions for Global Supply Chains, we stated that increased dimensions of supply chain risk and major disruption will further impact product sourcing strategies. This latest Allianz survey provides added evidence of both the increased dimensions of risk as well as the interdependencies of a disruption on the other important aspects of business including the value of the brand. It specifically calls attention to the increasing complexity and interdependence of business risks adding broader systemic threats for businesses. While the report highlights is a ranking business risks from a U.S. perspective, it further notes that notes that globally, business interruption and supply chain losses provide the greatest risks to businesses. That finding should be of little surprise to readers of Supply Chain Matters.
In its top ten rankings of U.S. business risks, business interruption caused in the supply chain was ranked as the number one risk by 61 percent of respondents. Rounding out the top five risks were natural catastrophe as number 2, fire/explosion at number three, and cyber-crime and IT failure as number five. Loss of brand reputation joined this list for the first time, and was ranked as the number four risk. That ranking, by our view is long overdue. While 2013 losses associated with natural catastrophe were considerably down from the levels of 2012, they were more costly in terms of business interruption.
Strategic sourcing and procurement teams need to continue to calibrate with their insurance and corporate risk colleagues as to the implications of these ongoing trends and the increased exposures that major supply chain disruption can present to any business. This is an area that can no longer be viewed as a passing trend.
Supply Chain Matters features an additional update to the devastating typhoon that struck portions of the Philippines this past weekend. In the aftermath, the world’s leading disaster relief agencies have swung into action in a bid to once again implement a globally-coordinated humanitarian response as quickly as possible. Tragically, the official death toll continues to rise while global media outlets give us all a visual sense of the overall destruction.
The UK’s Guardian has recently questioned whether an outside-in approach to disaster relief can succeed in saving lives. The newspaper editorial rightfully questions that the success of the aid mission will depend to a large extent on the capacity of local authorities and teams in the Philippines to respond to the disaster, while drawing on much-needed international aid resources. The Philippine government and its associated military forces are leading relief logistics on the ground in order to assess the extent of the devastation, restore vital infrastructure and ensure life-supporting aid reaches people in the worst-affected areas on the islands of Leyte, Samar and Cebu. The government has declared that the devastated areas are in a “state of calamity”, which should not come as a shock to those of us on the outside.
In its editorial, the Guardian questions whether the shifting the center of humanitarian action away from the western world to local and national control is the key to improving the efficiency of aid programs and ultimately, saving lives. The argument is that first responders have a critical role to play in any major humanitarian response. “As on the ground coordinators of a multilateral response, they need to be as agile as possible – taking account of the type of disaster that the population is facing, capacity issues in terms of response and taking appropriate action to save lives as quickly as possible. Time is the enemy in this initial response phase, as this is what ends up costing lives.”
The flaw in that argument is that in the wake of devastating disasters of the magnitude that are occurring of late, the affected governments have massive challenges to overcome, and that regardless of size and resources, the security, infrastructure and other challenges are often beyond comprehension. Teams need to have permission of national of local governments in order to conduct any local efforts and that is unfortunately the reality of sovereign, politically based governments.
Looking back on our Supply Chain Matters commentaries regarding these significant disasters we note similar concerns. Past events included hurricanes Katrina and Rita that impacted the U.S. Gulf Coast, the massive earthquake that devastated Haiti, the earthquake and tsunami that impacted Northern Japan, and Hurricane Sandy that impacted the Northeastern U.S. coastal regions. Each event called for more immediate response, yet global agencies coordinated all in their power to transport and coordinate aide. In the case of Haiti, a massive international effort managed to open up the island’s single airport, which was completely destroyed, in a manner of days utilizing coordinated international military resources.
While some may be frustrated by how long it is taking to get relief supplies to the affected people in the Philippines, the challenges of a destroyed infrastructure and a government that is taxing all of its available resources to coordinate the “last mile” of delivery are all compounding themselves. We noted in our January 2010 commentary that we often take the notion of “get it to me overnight” for granted, when global carriers and logistics networks make challenges so invisible to us. Disaster relief is a specialized type of logistics problem. It is very heartening to observe how many different countries, and how many logistics teams are once again rising to the challenge of providing basic aid in the time of most need.
In his Guardian editorial, Michael Minall argues: “Delivering effective and efficient direct action in the face of Haiyan demands more than just disaster relief, it needs a well-organised, multilateral logistical response that is led locally and nationally, rather than internationally. Such direct action works best when those overseeing logistical delivery of the disaster response are equipped and trained to respond in an agile way.” While Supply Chain Matters can acknowledge that argument, there are unfortunately certain realities to the magnitude of devastation and to the state of the national and local governments that deal with aftermath and attempt to return to whatever forms of normalcy that can be obtained.
Vast sums of monies were donated by international citizens to help in the aftermath of the quake in Haiti. Similar aid and donations assisted the other impacted regions. But the reality is that these events involve multi-year efforts of recovery. Japan continues to deal with the challenges of the Fukishima nuclear meltdown. Haiti has yet to return many citizens to their original homes. In some regions, there may never be the same condition as before the disaster.
Global aide communities and we as global citizens must continue to try to help when such events occur. Supply chain, logistics and transportation professionals will always rise to the challenge, but, the effects of Mother Nature’s power cannot be immediately overcome.
The definition of “Black Swan” events continues to be re-defined in this new era of extraordinary climatic events.
Super Typhoon Haiyan, which is being described as the most intense typhoon ever recorded, plowed across the central Philippines today, leaving widespread devastation. The typhoon roared onto the country’s eastern island of Samar at 4:30 a.m. local time, flooding streets and knocking out power and communications in many areas of the region, and then continued barreling into five other Philippine islands. Various media reports indicate that this massive storm hit with maximum sustained winds of 315 kilometers per hour (195 mph), with gusts up to 379 kilometers per hour (235 mph). This equates to the high end of a Category 5 hurricane in North America, one that can bring massive destruction and human casualties.
The reports we have monitored indicate the government agencies across the Philippines have taken extraordinary measures to evacuate people from vulnerable and high impact areas, and hopefully that may limit the extent of such casualties. The implications for destruction to basic residential, industry, and transportation infrastructure are an obvious concern.
A published report from The Washington Post (paid subscription or metered free viewing) quotes a weather expert indicating that “there will be catastrophic damage” in the wake of this storm. The typhoon was not expected to directly hit the Manila area, but with the breadth and size of this storm, there is bound to be some storm related impacts. If there is any good news, The Post article indicates that because this typhoon is fast moving, the full impact of flooding and heavy rain may not be as bad.
As we pen this commentary, reports indicate that most all communications have been severed within the impacted areas and thus little is known at this point regarding the state of damage and destruction. This massive storm is expected to move westward and impact the countries of Vietnam and Laos sometime this weekend.
We have alerted our readers to previous natural disasters occurring in the Philippines because of the global supply chain and services that are sourced in this region. Within the greater Manila area are many major semiconductor test and assembly facilities including those of Amkor, Maxim and On Semiconductor, to name a few. The area also hosts a number of major IT, corporate services and customer support outsourcing operations.Vietnam has also raised its profile in sourcing within industry supply chains, notably apparel and high tech industry sourcing.
This massive and historic typhoon comes in the wake of extraordinary climatic events that have impacted the Asian coastal and central regions in the past few months. We recently alerted our readers to the flooding impacts within Thailand, a massive cyclone that struck coastal regions of India, among other events. It seems that not a week goes by without another alert to an earthquake incident occurring in Japan, and there was yet another reminder earlier this month for the fragility of the Taiwan region to earthquake events. It is indeed a new era of historic climatic changes and it concerns major hubs of industry value-chains.
Obviously, procurement, customer service, supply chain risk management and other teams need to continue to monitor reports regarding conditions in the impacted areas, including any implications to industry and transportation infrastructure. It may be a few days before normal communications can be restored and assessments can be garnered. In the 2011 devastating earthquake and tsunami that impacted Northern Japan, it was several weeks before the full extent of destruction and impacts were brought to light.
Yesterday, an earthquake measuring 6.3 magnitudes struck eastern Taiwan and it adds more food for thought in terms of having active supply chain risk mitigation plans.
This latest major quake was reported to have struck at a depth of 19.5 kilometers and the epicenter was reported as 52.9 kilometers south of the coastal city of Hualien.
This tremor shook buildings in Taipei and according to a published Bloomberg report, caused the temporary evacuation of one of world’s largest semiconductor fab facilities. Limited damage was reported to the international airport.
Taiwan Semiconductor Manufacturing Company (TSMC) temporarily evacuated three separate fab facilities, but workers returned to their areas shortly thereafter. Another semiconductor producer, United Microelectronics Corp (UMC) temporarily suspended its operations and work was reported to have resumed after a few hours. According to Bloomberg, the administration of Hsinchu Science Park, where many of Taiwan’s high-tech companies reside, reported no reports of damage nor did the island’s 62 industrial parks. However, quite a number of aftershocks have occurred on the island.
This is not the first time that Supply Chain Matters has highlighted severe tremors in this region. Our last was in March of this year. Regarding yesterday’s occurrence, we were interested to read the U.S. Geological Service summary of this latest earthquake incident. The report notes: “This region of Taiwan is familiar with moderate to large earthquake activity, and has hosted over 60 events of M6 or greater within 250 km of the October 31 event in the past 40 years.”
Interesting read when you consider that a considerable amount of the globe’s semiconductor chip fab capacity is located in the region. In August, we highlighted a study from a supply chain risk consulting services provider which identified that within certain automotive and high tech supply chains a vast majority of suppliers are dependent on component supply from just four semiconductor suppliers. Guess where many of their fab facilities are located?
And, if the Taiwan incident is troubling, consider that yesterday, a magnitude 6.6 tremor occurred in Chile. The two countries was the largest reserves and mining capacity for lithium, which is now rather important for automotive and alternative energy related product supply chains, are Bolivia and Chile. Chile was hit by a 8.8 magnitude quake in 2010.
Supply Chain Matters provides an update to our previous commentary regarding a devastating September fire at a SK Hynix DRAM production facility in China. At the time of the incident, there was widespread speculation that the interruption of supply would spike DRAM component prices, especially since Hynix is a major memory chip supplier for Apple.
This week, SK Hynix posted a record quarterly profit as increased memory chip prices provided a cushion to reduced output following the China fire. Revenue for the quarter jumped 69 percent. However, according to a syndicated Reuters report published on the CNBC Business network, earnings are expected to dip in the current quarter due to anticipated slow recovery in the affected plant’s production rates. The report indicates that Hynix is yet to completely restore operations at the damaged plant in China which accounted for an estimated 15 percent of global demand for memory chips. Since the fire, average prices for Hynix’s DRAM chips have risen 5 percent. As we speculated in our original commentary, the impact of this price increase is more likely being felt by consumer electronics manufacturers that do not have the clout or volume scale of Apple.
Thus, while the market implications of the fire worked in Hynix’s favor in its most recent quarter, restoring full production in the impacted China plant remains an important priority for Hynix. Meanwhile, competitors Micron Technology, Samsung Electronics and Toshiba gain benefit from increased market prices and reduced supply.
Supply Chain Matters provides an update regarding our previously published supply chain disruption alert involving current flooding conditions in Thailand.
A published report on Bernama, the Official News Agency of the Government of Malaysia, published late last week indicates that the flooding that has affected Thailand for a month now is estimated to cost economic damage of between 10-15 billion baht. It further reports that the damage could have been worse if it had affected Thailand’s industrial areas. However, the flooding did affect the entrances to some of those factory areas causing workers great difficulties in getting to work.
A syndicated Reuters report featured on the Chicago Tribune web site on Monday reports that 17 factories were temporarily shut on Monday at the Amata Nakorn Industrial Estate, dominated by foreign companies, after flood waters blocked nearby roads. As we pointed out in our earlier posting, this industrial complex houses a number of Japanese based producers within both automotive and high tech supply chains. In the latest Reuters report, a spokesperson for Amata Nakorn is quoted as indicating that the 17 factories were shut after the workers proved to be unable to reach them and the Thailand navy has been asked to help pump out the water. The estate was using more than 100 water pumps to speed drainage and the situation was reported to have improved from the weekend, with levels in many areas dropping 6 inches. Likewise, flood waters in the remainder of the country have eased.
Thus, while it does not appear that the current flooding is in any way taking on the severity to what occurred in 2011, there are temporary interruptions of supply continuing as government agencies and industrial estate owners continue to work on clearing roads and industrial park entrances.
Procurement and supply chain planning teams can obviously breathe easier but should continue to monitor developments and plan for temporary disruption.