We have another reader update regarding the global supply chain impacts from the devastating monsoon floods that have impacted Thailand and other southeast Asian countries.

While current news reports indicate that some of the flood waters are receding and the situation is improving, the effects remain.  In human tragedy, the death toll no exceeds over 600 persons, and many continue to suffer from the after effects of this natural disaster. The Associated Press reports that over two-thirds of the country’s provinces have been affected by the floods. Seven of the country’s important industrial parks were flooded impacting what is forecasted to be two percentage points off Thailand’s GDP growth this year. The United Nations Food & Agriculture organization has warned on the potential for severe loses in agricultural food production across the region.  Rice supplies are particularly impacted since over 12 percent of rice farmland has been damaged across Thailand, along with another 12 percent in Cambodia This is also in addition to the rice crop damage caused by the tsunami in northern Japan.

Our last update noted the significant vulnerability for hard disk drive (HDD) and Japanese automotive component production sourcing. An article published in Bloomberg BusinessWeek this week features an interview with Seagate Technology CEO Stephen J. Luczo.  Seagate was one of the hard disk drive manufacturers whose factories in Thailand were largely spared, but Mr. Luczo indicates in the interview that the impacts are much longer than people are assuming, until at least the end of 2012. Average HDD drive prices have already spiked by 20 percent and higher and what supplies and capacity that remain are being bargained among major OEM manufacturers. According to Mr. Luczo, some have offered $250 million upfront to secure supply. Supplies and precision production equipment from as many as 130 suppliers may still be under water, and there are concerns that smaller suppliers may not have the financial resources to rebuild.  A spokesperson for disk drive motor manufacturer Nidec reported that divers were sent into its factories to unbolt production equipment to be floated to safe areas, and later transported to alternative Nidec factories in China and the Philippines.

Computer OEM’s Dell and HP have weighed in with statements related to their latest earnings announcements.  Dell indicated that it assembled a risk management team within 48 hours, and began pulling in component inventories from suppliers into its own warehouses. Dell expects the aftermath of the floods to be an issue for the next couple of quarters.  HP indicated that it began to make strategic buys of HDD inventory in October, and indicated tough sledding for others in the industry. Industry analyst firm IDC now forecasts that PC shipments will decline between 2.2 and 3.4 percent in the fourth quarter, down from a previous forecast for 5.1 percent growth. According to IDC, Q1 output may drop anywhere from 1.8 to 13.4 percent.

In automotive supply chains, Honda continues to appear as the most severely impacted OEM, having to previously cut-back production by as much as 50 percent in some regions. The company has now indicated that it will begin to increase production across its North American plants in the next two weeks. Toyota, who suffered a sharp drop in fiscal second quarter earnings withdrew its earnings forecast for the remainder of the year as it continues to navigate its way through this latest supply chain shock. Toyota indicated that between October 10 and November 12, the impact of the floods on closed facilities resulted in 150,000 units of lost production.

At this point there is little question that the supply chain impacts from the floods in Thailand will be an ongoing business headline for some months to come and supply chain response management initiatives will be critical for the many companies impacted.

Bob Ferrari

The following posting can also be viewed and commented upon on the Supply Chain Expert Community web site.

The ongoing devastating monsoon floods that continue to impact Thailand will once again demonstrate the response management capabilities among high tech electronics and automotive supply chain teams.  The word “agility” is often an overused term in the context of supply chain processes, but in the case of the unfolding supply chain disruption, it will have significant meaning.

First and foremost, our hearts go out to people of Thailand.  The floods have now claimed over 500 lives, most from drowning, and countless thousands continue to endure the ongoing effects.  Weather forecasts indicate that the heavy rains, which began in July, will continue through the end of the year and we hope that the rains end sooner than that.

As with the March massive earthquake and tsunami that struck northern Japan, the cascading global-wide effects are still unfolding across multiple tiers of supply chains.  Flooding in the country has forced the closure of more than 1000 factories.  Thailand itself represents a significant vulnerability for hard disk drive (HDD) and Japanese automotive component production sourcing.  Estimates are that the region represents 70 percent of global HDD production. Western Digital, the global leader in HDD obtains 60 percent of its inventory from its factories in Thailand and the company has already indicated that it will ship less than half of planned supply for the remainder of 2011. Japan’s Nidec Corp., a major supplier of precision disk drive motors had the majority of its production capacity impacted, and news reports point to production workers ferrying available undamaged inventory on boats in an attempt to move the motors out of flood prone areas.  Industry observers warn of an outright severe shortage by Q1 of 2012, if alternative production is not found. Unlike what occurred in Japan, HDD and component producers had minimal safety stocks to buffer a major disruption of supply.

A posting in Eweek cites industry participants noting that once the rain stops and access to flooded factories can be garnered, it would take 2-4 weeks to pump out flooded buildings and upwards of 60 days thereafter before production levels could resume. Some observers point to a 20 million unit shortfall in supply per month before normal supply levels recover, while more conservative estimates point to a 50 million HDD shortfall over the next two quarters.  Some have stated that the ongoing Thailand floods will have a greater impact on high tech and consumer electronics supply chains than that which occurred in Japan earlier in the year. That impact will surely cascade to global storage and PC manufacturers.The PC industry has already been in turmoil and this incident adds more business challenges.  A New York Times article (paid subscription or free metered view) further points to a pending impact for cloud computing and infrastructure providers further up the stream, who rely on continued acquisition of HDD hardware to support the explosion of cloud and data storage needs.

For automotive supply chains, particularly those of certain Japan based manufacturers, Thailand based factories represented considerable sourcing of electronic components, plastic and rubber parts.  Honda and Toyota are the most impacted thus far, and pending parts shortages have already led to production cutbacks at multiple final assembly production plants including Japan, North America, and other geographic regions.  According to a Bloomberg BusinessWeek article, Honda has been especially hard hit with its two Thailand final assembly plants being totally submerged since October 6. Toyota estimates that since October 10, the floods have already reduced its Thailand based auto output by 69,000 vehicles. Jim Fulcher has provided a Supply Chain Expert Community posting that elaborates further on the cascading impacts for automotive supply chains.

Business and industry media this week has rightfully raised questions as to how these recent “black swan” or unprecedented natural disaster events have exposed vulnerabilities among industry supply chains. Has the quest for lowest cost production and hyper lean supply chains overridden and exposed vulnerability to significant business risk?

While many in the community can weigh in on that discussion, the immediate crisis at hand is once again, the testing of supply chain response management capabilities among those high tech and automotive companies currently impacted, and those that will be impacted.  After all, would an executive S&OP process ever consider the reality of mid double digit interruptions in critical supply or extraordinary supply price hikes caused from that shortage?  The answer is no!

However, during the Japan crisis, some companies such as Nissan, Cisco and Jabil demonstrated that once the disruption occurred, they had the ability to quickly assess overall supply and revenue impacts from multiple layers of their value-chains, and had the response scenario capabilities defined to either re-route supply from alternative sources, allocate limited production to key customers and distributors, specify and qualify alternative parts, or call on existing suppliers to help buffer impacts.  Even the supply chain teams of Honda and Toyota, that were the most impacted, eventually found ways to analyze impact areas and overcome disruption beyond original expectations.

Supply chain teams need to address two looming and significant cross-functional challenges in the days to come.  The first is re-visiting business and supply chain planning capabilities in light of the reality that major disruption, either internal or external related, is a given.  The ability to have scenario plans in-place along with the abilities to quickly assess and proactively respond to disruption are new table stakes. The second and longer-term challenge is a complete re-visit of component and finished-goods sourcing strategies in the light of what both the Japan, and now Thailand disasters have uncovered.  There can be no significant vulnerability to required supply streams, and every major geographic region requires an identified and well-understood business and supply continuity plan.

Bob Ferrari

The following Supply Chain Matters guest posting has been provided by Mark Wells, a principal at End-to-End Analytics.

Online Wall Street Journal Photo

“Supply Chain Matters” readers are painfully aware of yet another serious supply chain disruption, this time from tragically severe flooding in Thailand.  According to recent reports featured on the Wall Street Journal Online site (paid subscription or metered view may be required) Ford, Toyota and Michelin have cut back operations.  Ford says that lost production could reach 30,000 vehicles.  Forty percent of hard drives for personal computers ship from Thailand  and Western Digital makes sixty percent of its disk drives in that country.  More disruptions to value networks are surfacing as I write as a result of this catastrophe.

While the human cost of these disasters is devastating and defies valuation, the cost to businesses whose value networks include operations or suppliers in Thailand will not only be measurable, it will also be significant.

At a recent IBF Conference in San Francisco John Brown, Director, Risk Management, Supply Chain Development at The Coca-Cola Company (TCCC) recently made the point that while you cannot simulate the infinite list of events that might disrupt your supply chain, you can simulate most of the effects.  For example, if you have a significant portion of your value network in a country or region, you need to anticipate a loss of supply and have a contingency plan on what to do when that happens.  Then, as Kevin Harrington, Vice President, Global Business Operations, Customer Value Chain Management, Cisco Systems, has emphasized in multiple presentations, it is important to train your organization on exactly what procedures to follow in the event of a disruptive effect.

Firms who are leaders in planning to be resilient in the face of disruptions evaluate at least single level effects, create contingency plans for each, and then train key personnel on how they will operate under those contingency plans.  It’s difficult to take the time do training when there is no visible disruption, but that experience will become invaluable when trouble strikes unexpectedly.

Natural disasters are not the only source of disruption, but they are significant and difficult to anticipate.  When a natural disaster, civil disruption, or similar event resulting in a serious downgrade to your value network transpires, you need the capability to quickly simulate the how flow of materiel, information and cash can be facilitated with portion of the value network seriously degraded.  Beyond simply having the technical ability to simulate, you need the talent and insight to ensure that the inputs and assumptions upon which you base the model are valid and that the conclusions you draw from the results are reasonable and feasible.

Economic risks can compound the effects of these natural disasters in the form of rising and or uncertain commodity prices as well as fluctuations in currency exchange rates.  Skilled data scientists can build econometric models that enable you to predictively analyze commodity prices and foreign exchange rates, not only to arbitrage risk today, but also so that you will know immediately what strategic procurement actions to take in the case of a disruption.  Dow Chemical, for example, has created an advanced analytics group that focuses on (among other things) predicting prices of key manufacturing inputs.

It was Ben Franklin who said, “By failing to prepare, you are preparing to fail.”    Preparation for a disruption to your value network through planning and practice will always seem like overkill before the disruption.  During the disruption, however, previous preparation will demonstrate the wisdom of your investment in planning and practice and help to maintain the value of your enterprise.

Other reading on the topic include recent posts in this blog, “The Effect of Supply Chain Disruptions on Long-term Shareholder Value, Profitability, and Share Price Volatility,” by Vinod Singhal from Georgia Tech and Kevin Hendricks of The University of Western Ontario (June 2005) and The Resilient Enterprise:  Overcoming Vulnerability for Competitive Advantage  by Yossi Sheffi, MIT Press 2005.

Arnold Mark Wells is currently a principal at End-to-End Analytics.  He blogs weekly at Friday Forethought.

Since our initial Supply Chain Matters alert ten days ago regarding monsoon-related floods impacting Thailand, the magnitude of the ramifications supply chain disruption is becoming more measurable for automotive, high tech and consumer electronics supply chains, and the duration of disruption more extended.  Meanwhile, water is massing just outside the capital city of Bangkok with the provincial governor warning that heavy flooding in the city is imminent. The United Nations is now warning of pending food shortages in the regions as rice and other vegetable crops become more inundated with flood waters.

Last week, high tech electronics firms were compelled to issue business impact statements.

Thailand represents significant disk drive production output, estimated to be close to 25 percent. Some estimates that global output could fall as much as 30 percent in the next three months, which is a significant magnitude of disruption. Industry forecaster iSuppli is indicating that industry disk drive supply could constrained until Q4-2012, which is sobering. The test will be how much of residual inventory and allocation strategy can buffer the impact for those further up the value-chain.

Disk drive maker Western Digital indicated that flooding of production facilities within Thailand, which represents close to 60 percent of its hard disk drive production, is having a “significant impact” on operations and its ability to fulfill customer demand. The facility represents 10 percent of Western’s total worldwide output. Seagate Technology, another disk drive manufacturer indicated its production will be impacted in the current quarter though it indicated that its Thailand facilities remain operational.

The floods are additionally impacting component suppliers with ON Semiconductor, Hutchinson Technology and Microsemi Corp. each indicating a substantial impact in supply. ON Semiconductor indicated that its Sanyo chip operations will remain shutdown indefinitely. Severe damage is suspected but workers have been unable to assess the overall damage. According to a Wall Street Journal report, the company expects the flooding to impact earnings for a minimum of 3-4 quarters with an estimated $40 million to $60 million in lost revenues per quarter.

Both Nikon and Sony have also indicated disruptions may impact the production of digital cameras and lenses as well as delay new product launches. These producers will already in the process of mitigating disruptions from the March tsunami that impacted northern Japan.

The potential impact to PC related companies could not come at a more inopportune time.  Customer shipments to satisfy the upcoming 2011 holiday buying season are about to occur while the implication of consumer preference for tablet and smartphones threaten to erode revenues and product margins. While many PC manufacturers remain silent, Apple CEO Tim Cook was quoted that he expects an overall industry shortage of disk drives.  A statement such as this emulating from the head of Apple is a sure indication of industry concern. Industry shortages will lead to price spikes and potential hoarding if suppliers do not institute controls.  The head of contract manufacturer Jabil’s supply chain, indicated at the Kinexions conference last week that if it were not for the proactive anti-hoarding and allocation buffer policies of Japan based component suppliers after the March tsunami, the situation could have been a lot worse for contract manufacturers. The same potential situation faces PC OEM’s who procure the bulk of disk drive inventory for their respective contract manufacturers.

Similarly, automotive supply chains are now incurring the impacts of the floods. A Wall Street Journal report indicates that Toyota will reduce production hours at its plants in Japan for the remainder of this week in order to cope with expected shortages of some parts. Toyota had previously scaled back production volumes in Indonesia the Philippines and Vietnam, and three plants in Thailand due to parts shortages. An estimated 100 parts have been impacted by supply disruptions.

We often communicate the overall importance of the ability for supply chain teams to perform scenario and contingency planning.  What if supply chain component supply was impacted by 10-20-30 percent? Unfortunately, in high tech and automotive sectors, these scenarios are becoming very real. As was the case after the Japan tsunami, the resiliency and determination of supply chain teams will be ultimate test of how long and to what degree, industry supply chains are impacted by the monsoon floods that remain occurring throughout Thailand and the Asia region.

Bob Ferrari

It is a Monday morning and I’m facing a six hour plane ride enroute to the Kinaxis Kinexions conference.  Noting that my carrier is Southwest Airlines, I was compelled to not only bring my own food and snacks but to bring lots of reading material to compensate for zero entertainment and creature comfort amenities. One of the best companions, I have found for a long plane ride are unread copies of Economist magazine where there is ample time to read from cover-to-cover. The October 8 issue provided an insightful but stark commentary on the business implications of current economic events occurring across Europe which I suspect will have many potential implications for global supply chain strategy and preparedness.

The article is titled: Under the volcano- how companies are preparing for various scenarios, (paid subscription or metered view requirement) and it provided some stark reminders that European businesses remain highly concerned about current events surrounding Europe’s ongoing sovereign debt crisis and how these events will unfold in financial and economic terms.  Some business forecasters believe that the Eurozone could fracture or possibly break apart completely.  That would imply implications for credit, inflation, currency and cross-border trade. Reading of the various scenarios and contingencies that some European manufacturers are undertaking should cause supply chain executives to also reflect on contingency planning.

Supply Chain Matters believes that senior supply chain executives, if they have not done so thus far, should be initiating and contemplating scenario plans and contingencies in three potential areas of supply chain impact. These three areas are to buffer overall business impacts, but in the perspective of crisis bringing opportunity, there may be some opportunistic considerations to consider as well.

The three contingency areas should include:

• An impact to B2B, P2P and E-Commerce fulfillment strategies involving suppliers and customers located within Eurozone countries.  These processes are currently predicated on a single Euro-based currency. If the Eurozone were to split into two-zones, strong and weak, or to split altogether, the implications for systems supporting B2B commerce would be rather fluid, and potentially complex.  There would be implications in supplier contracts in adjusting or re-negotiating financial exposures, invoicing and currency collection. While contracts may have contingencies already identified, it would be wise to begin a contingency focused analysis of areas of potential impact or exposure.  Similarly, IT support teams should be thinking about potential systems impacts and response strategies.

• Another area could be supply chain shocks in logistics/transportation and customs requirements.  Today, Europe and global-based manufacturers can assume a seamless physical flow of component and finished goods across Eurozone countries.  Hopefully that will continue, but then again, sudden shocks could occur if certain countries are jettisoned out from the Eurozone or forced to fall back on independent customs and transport regulations. Severe financial crisis could bring motivation t0 add more import tariff revenues to depleted treasuries or weakened economies.

• The third contingency area would be financing of inventory and working capital.  Similar to what immediately occurred during the 2008-2009 financial meltdown, some European manufacturers, especially those residing in financially weakened banking sectors such as Greece, Ireland, Italy, Portugal or Spain are already experiencing difficulty in acquiring affordable access to credit and loans.  A worsening of bank fragility or more outright bank failures would cause an additional credit crisis for these companies, and this would impact supply chain working capital, production and inventory deployment strategies.  Mid-market firms are especially vulnerable. Financial supply chain, suppler health checks, inventory and tooling investment implications should be considered.

The Economist article additionally notes that many European firms are now accelerating efforts to buffer exposure to a potential Europe financial crisis, and are thus are aggressively accelerating plans to market and sell their products within the emerging market economies of China, India and Latin America.  That makes lots of sense.  But at the same time, non-European companies may be afforded added opportunities to compete for additional business in these emerging markets by virtue of the existence of a more stable currency, banking or financial system that provides affordable access to financing product innovation, services or added inventory pipeline.

The intent of our commentary is not to raise immediate alarms but to begin prudent planning for possible supply chain disruption scenarios.  Just like last year’s volcanic ash incident that shutdown Europe’s air traffic, high uncertainty should motivate active contingency planning.

Readers and supply chain focused consultants are welcomed to share their perspectives for contingency plan considerations.

Bob Ferrari

The country of Thailand, which has become a manufacturing hub for many Japan based manufacturers, continues to be impacted by extraordinary monsoon floods, and these floods have now caused supply chain disruptions across automotive, electronics and high tech and other manufacturing sectors.

Teams with supply chains that extend to Thailand, or who have key suppliers whose supply chains include Thailand should initiate inquiries and, if required, contingency and risk mitigation plans.

At least 281 people have lost their lives since July and there are now growing fears that the capital city of Bangkok could be threatened. Weather forecasts have not been optimistic with potentially worsening rains in the coming weeks.  According to published reports in both the Financial Times and the Wall Street Journal, (paid subscription or metered views may be required) the impact to companies is rippling through global regions as supply chains incur stoppage of production.  Many assembly plants were forced to close and similarly may be impacted by suspensions from key supplier plants.

In the auto sector, Honda has been especially impacted with reports that it’s Ayutthaya based automobile and motorcycle plant have been flooded, potentially impacting close to 5 percent of global output. Honda is considering whether to re-route parts from its Japan facilities to Thailand and other impacted supply chain facilities, such as India.  According to the FT and WSJ report, Toyota Corp. and Ford Motor Co. have temporarily suspended production at respective Thai facilities, with Toyota having to close three facilities impacting close to 8 percent of Toyota’s global production.  General Motors and Nissan are reported to be still operating normally.  The Rojana Industrial Park, located north of Bangkok where many parts suppliers are clustered was swamped by floodwaters.

High tech and image processing companies are also impacted. Nikon Corp. incurred a flooded production facility that produces single-lens reflex cameras and lenses, while a printer factory of Canon Inc. was also impacted.  Earlier this week Western Digital had to suspend disk drive manufacturing to protect its facilities and is assessing impacts among its associated suppliers. The Sun Daily of Malaysia reports that the immediate impact on Malaysian high tech manufacturers is expected to be worse than the March tsunami that occurred in Japan. The extraordinary wet season is expected to continue in the next few weeks but businesses note that recovery could be rapid once the floods subside.

While the overall impacts of this natural disaster event in Thailand are yet to unfold, some initial observations are warranted.  Some manufacturers are noting that they have adequate safety stocks to buffer the impact for the next several weeks.  That obviously points to robust inventory and contingency planning.  Other companies are obviously initiating their broader business continuity and supply chain risk mitigation plans.  This is yet another reminder of the critical importance of having such plans, and whether inventory planning needs to be revisited in the light of more frequent occurrence of natural disaster occurrences.  The year thus far has featured severe flooding events involving China, Japan, and now Thailand.  India is also experiencing extraordinary flooding.

Supply Chain Matters will continue to monitor this supply chain disruption event and will feature additional commentary as more information comes forth.

In the meantime, readers are encouraged to share your first-hand observations either in the Comments section affixed to this posting or sending us an email update.  The email address is info <at> supply-chain-matters <dot> com.

Bob Ferrari