Supply Chain Matters provides another reader update regarding the global supply chain impacts from the devastating monsoon floods that impacted Thailand and other Southeast Asian countries in the Fall of 2011. Readers might recall that beyond the tragic loss of life, the flooding impacted over two-thirds of the country’s provinces and that seven of country’s important industrial manufacturing parks were severely flooded. While some factories have restarted operations, others continue to struggle with various issues.

In our previous general update in mid-November, we honed in on the specific impacts that both the high tech and automotive industries would potentially encounter. As we enter 2012, these impacts continue, although the picture appears to be a bit more optimistic.  On the other hand, as noted in our 2012 Predictions for Global Supply Chains, the broader and more far reaching implications concerning the Thai flooding and other 2011 disruptive events are raising significant new considerations for strategic and other product sourcing decisions in the months to come.

For high tech and consumer electronics, all eyes remained focused on hard disk drives (HDD) production.  Western Digital, initially the most impacted manufacturer, re-started some partial HDD production in its Thai Bang Pa-in facility in the first week of December, one week ahead of schedule.  That facility had been submerged under six feet of water.  Western Digital expects to ramp-up production at this facility during the March 2012 quarter. Other of the company’s production facilities in Thailand are in the process of re-starting.  The expected impacts on reduced overall HDD supply and pricing are underway.  Both EMC and HP increased large-scale storage system pricing in late December in the range of 5 to 15 percent, but supply shortages have amplified price levels even further. In Asia, there are reports that HDD pricing at the retail level has spiked as much as 50 to 100 percent. The Semiconductor Industry Association (SIA) released a statement in early January noting: “Supply chain disruptions resulting from the floods in Thailand have impacted semiconductor sales in the near term, however OEM’s are expected to recover production losses over the course of the next few months.” Industry leader Intel attributed its latest quarterly decline in revenues to the impact of supply brought about from the result of the floods.

Computer OEM’s such as Apple, HP, Lenovo and Dell remain publically silent concerning an ongoing shortage of disk drives but we are sure that internal supply planning teams have been hard at work sorting out disk allocation and various product offering scenarios.  As anticipated, most of the available supply is being allocated to higher priced, more profitable PC products.

Regarding other industry impacts, reports from Japan indicate that the country experienced a 2.6 percent month-to-month drop in factory production for November, which was worse than had been predicted. According to an AFP report, production of passenger cars and mobile phones were among the hardest hit because of the supply shortage impacts emanating from Japanese-plant sourcing in Thailand. However, Japanese automotive providers were reported to be more optimistic for December and January production output levels. Both Toyota and Honda have now acknowledged that the combination of massive supply disruption brought about from the earthquake and tsunami that impacted Japan in March, and the Thai monsoon related floods, have caused both to lose market share because of reduced vehicle output.

Other industry impacts have come to light.  PPG Industries has indicated that production of certain optical components prevented that company from satisfying supply contracts and conducting normal business.  Goodyear Tire and Rubber warned in December that impacts of the Thai flooding could result in “a potential global shortage” of aircraft tires.

Beyond the tragic loss of life, the World Bank estimates that flood damage has reached $45 billion and rebuilding efforts are estimated at about $25 billion. This loss, along with the unprecedented magnitude of loses emanating from certain areas of Asia and Australia has motivated major global insurers and re-insurance firms to reduce their exposure to certain catastrophe prone areas.  The Financial Times recently reported that exposures in Australia, Indonesia, Taiwan and Vietnam have all experienced large insurance premium rises during key early January policy renewal negotiations.  Noted were premium rate increases in the range of 10 percent to as high as 35 percent in these countries, with certain exposures in Australia rising in the range of 40-75 percent, and New Zealand 80-150 percent.

Supply Chain Matters continues to believe that these developments will motivate CFO’s and Chief Supply Chain Officer’s to revisit near and longer-term sourcing strategies that directly relate to regions deemed high risk for natural or catastrophic future incidents.  Beyond the cost of direct labor and transportation, a new, more sobering financial input has been added to the evaluation of strategic sourcing, and that should be prompting strategic sourcing teams to begin to revisit sourcing strategies.

The year 2012 has not added to the confidence of a year that was not like 2011 in terms of global supply chain disruption.  Last week, a 7.2 magnitude earthquake that struck of the coast of Indonesia prompted a brief tsunami warning.  Luckily, the tsunami did not occur and damage was reported as minimal, but nerves were definitely rattled.  The bottom-line is that the probability for global supply chain disruption prompted by natural disasters and catastrophe events remains high and manufacturers are about to actively re-examine global sourcing strategies weighting a new and financial sobering aspect of geographic exposure to regions more prone to these incidents going forward.

Bob Ferrari

©2012, The Ferrari Consulting and Research Group LLC and Supply Chain Matters blog, All rights reserved.

A highly significant supply chain related news story comes this week from Honda Motor Co., one that has the potential to bring significant change to North America based manufacturing.  As the Christmas holidays approach, Honda’s North American and supply chain partner employees will certainly have some cheer.

According to an article published in the Wall Street Journal (paid subscription or free metered view restriction), Honda plans to shift a major portion of its production capacity into North America over the next few years.

The implication for Honda’s current North American production facilities and supporting supply chains are highly significant since the numbers indicate as much as a 40 percent increase in production and the positioning of Honda North America as both a producer for both domestic and global export markets.  If the full plans are implemented, North America would represent more than 50 percent of Honda’s global production capability, with export volumes in the range of 200,000 to 300,000 vehicles annually.

The reasons for this major announcement are fairly obvious and far reaching.  With the continued stubborn strength of the Japanese yen making manufacturing exports highly unprofitable, many Japanese based manufacturers can no longer afford to have the bulk of export oriented manufacturing based in Japan.  This has led to many difficult decisions, not only for Japan’s automotive producers, but high tech and consumer electronics manufacturers as well.  The one high visibility exception has been Toyota, with its chairmen continuing to believe that the company has a commitment to continue to have some export production based in Japan. But even Toyota has begun planning for shifting increased capacity and output to North America and other global based facilities.

The other motivation points to global supply chain risk mitigation. The major disruptions concerning the devastating earthquake and tsunami that struck northern Japan and the monsoon-related floods that impacted numerous manufacturing facilities within Thailand have exposed certain risk vulnerabilities. At the height of the tsunami crisis that impacted Japan, Nissan exported V6 engines from its North America plants to Japan in order to keep its southern Japan plants operating. That action, along with others, caused Nissan to overcome the crisis much quicker than some of its Japan based competitors.

As noted in our 2012 Predictions series, 2011 events have been a wake-up call for globally sourced manufacturers, and global insurance and reinsurance carriers are in the process of re-evaluating high risk geographies, which could result in higher insurance premiums for regions more vulnerable to catastrophic natural disaster.

The prospects for increased manufacturing and automotive supply chain related jobs for the U.S. are obvious.  Supply Chain Matters, however, would add a note of caution.  For North America to become a new source of global export capability there will need to be major investments in supply chain and skills infrastructure.  In the case of Honda, the concentration of North American production and supply chain facilities lies in the U.S. Midwest region (Ohio, Indiana, Ontario Canada), and vehicles will have to be transported to export ports on either the U.S. west or east coasts.  If other Japanese and foreign owned manufacturers also expand, current facilities in the U.S. Southern region would add transportation segments to export-related ports.  With the pending opening of an expanded Panama Canal, U.S. ports could experience a dramatic increase in operations. Air freight hubs such as Huntsville and Nashville would be impacted with increased operational volumes.  With inter-modal trucking and rail capacity currently constrained, port authorities as well as rail, third party logistics and trucking carriers will need to invest in added infrastructure, equipment and productivity tools.  In the area of skills, many U.S. manufacturers complain that they cannot fill existing needs because of a lack of technically skilled people.

Our readers in North America should have one significant takeaway from the implications of this latest Honda announcement.  Now is the time to hold politicians and industry accountable for actively supporting and shepherding the required investments in world class transportation, logistics and skills infrastructure that can sustain North America as a global manufacturing hub and a generator of jobs.

The current Congressional gridlock must move beyond partisan politics and focus on what generating jobs really implies.  Recent opinion polls indicate that the U.S. electorate holds their Congressional legislators in the lowest regards.  News commentators now joke that criminals have higher public opinion ratings.

Supply Chain Matters continues to believe that the U.S. Presidential Commission on Jobs and Competitiveness must include in its recommendations both assessment and specific action plans for needed changes in U.S. supply chain and logistics infrastructure, and Congress and industry should immediately act in concert for active implementation of needs.

As the saying goes, when opportunity strikes, take action!

Job growth is on the doorstep, but it comes with a resolve to action. Get involved and have your voice heard.

Bob Ferrari

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

We have been catching-up on articles and blogosphere commentary published while we were away on vacation for a week, and the Spend Matters blog alerted to a recent Reuters article, Toyota aims for a quake-proof supply chain.  The article should capture our reader’s interest because it outlines the action steps automaker Toyota is now undertaking as a result of its experiences from the devastating earthquake and tsunami that impacted northern Japan in March.

We have our own observations to share regarding the Toyota actions outlined.

First, readers should note the target set by Toyota- the ability to recover from any future earthquake within two weeks-time. That is a bold objective, and Toyota should be praised for setting such an objective, but we also opine that a five year timeline seems too conservative. Also note that Shinichi Sasaki, Toyota’s Executive Vice President, who is in charge of Purchasing, has assumed leadership for this initiative.  Too often these days, the overall leadership and accountability for supply chain risk management initiatives are unclear, and procurement seems to be reluctant to take on such functional-wide leadership.  The reasons are many, but suffice to state, if there is one very important takeaway from the Japan incident is that our supply chain community needs to step-up to active accountability for driving a supply chain risk identification and risk mitigation plan. It can be procurement, supply chain operations or product management, but the message is some group needs to lead, and not after a major incident occurs, when the bottom-line has suffered.

Toyota outlines three components to its risk management plan. They include some standardization of certain parts across Japanese automakers, especially those parts that have risks to revenue and production disruption.  We believe that every supply chain organization should identify components at-risk if major disruption occurs.  The open question for Toyota is whether other resident Japanese automakers are open to cross-company collaboration.  We believe that they are.

A second component is to influence lower-tier suppliers to hold more safety stock, perhaps a few months’ worth, for specialized components that cannot be standardized.  The article notes that this is to avoid a repeat of the current major shortages of microchip controller units (MCU’s) which were produced by Renesas Electronics Corp, who is still striving to resume full production.  While some of our readers would scoff at a strategy of encouraging more safety stock, the Japan earthquake brings more awareness to the identification of parts at risk. We share the viewpoint of Spend Matters that an important open question is whether Toyota’s and other automaker have the willingness to adequately compensate suppliers for this added stock. We believe it is smart strategy, and cost should be the least of concern.  Another important consideration is where to store this safety stock, since spreading the locations across non-earthquake prone regions may insure that inventory is not at risk if a particular region is severely impacted by damage.

The third component is ever bolder and has supply chain strategic and political implications.  It calls for each geographic region to have an independent key supply strategy, so that a future major earthquake in Japan or other geographies would not severely impact production across all regions.  Readers may recall that in the March incident, Toyota’s North American and European production operations were additional impacted with production interruptions or slowdowns.  Since 90 percent of North America supply is currently sourced locally, the strategic implication is that Toyota is now considering the sourcing of engines and transmissions in the local onshore region.  This will be an important boost to North America’s auto supply chain and its supplier network.

We do not share the Spend Matters viewpoint that Toyota was “the poster child for lackluster supply risk planning coming out of this year’s earthquake and disaster.”  That label is perhaps too harsh and could apply to many Japanese and non-Japanese manufacturers.  Multiple Japan based automakers have suffered financially from the effects of this disaster while others have benefiited. Supply Chain Matters has previously cited Toyota for its candid supply chain impact communications during and after the Japan crisis, even though the messages changed constantly.  Other Japan based manufacturers were not as candid and open with customers.  The reality was that many manufacturers did not really know initially what the impacts would be, but soon found out. Manufacturers were very fortunate that their supply chain teams rose to the challenge and worked yeoman hours to fully assess parts impacts and institute recovery plans in unheard of times.

Other criticism of Toyota as using the earthquake as an excuse to become a global company belies the reality that Toyota has been a pioneer in global presence and was one of the first foreign manufacturers to invest in North America and Europe many years ago, and continues to have a global supply chain and distribution footprint. Toyota certainly has corporate cultural and supply chain faults and has paid the price in a hit to its reputation and global market share  ranking in the market. Our community perspective should be praise for many ongoing proactive actions to address previous oversights and communication lags.

Let us not overlook the political considerations of one Japanese company, who in spite of many economic and currency indicators to the contrary, is trying to maintain some open commitment to a manufacturing and jobs presence in Japan, while others like Sony are moving offshore. In today’s uncertain economic and political climate, that is an important consideration.  Do readers really believe that a Chinese or North American company is any different?

Let us  also keep the dialogue continuing since every supply chain organization needs to understand what the Japan earthquake and tsunami has provided as a learning event. Consider that as this commentary appears, roughly six month post incident, some Japanese companies are still in the process of resuming full production operations.

What happened in Japan was a watershed event for global supply chains, and will continue to be our ongoing case study in proactive supply chain risk management.

Bob Ferrari

A report in today’s Wall Street Journal (paid subscription or preview account required) now indicates that Toyota expects to achieve 90 percent of normal production levels by June.  That is quite a difference from the 70 percent estimate provided a few weeks earlier and the declaration by Toyota’s President, Akio Toyoda, that normal production levels would not occur until November.  Last month, Toyota North America also warned its dealer network to expect limited supply of finished inventory throughout the summer.

While many of Japan’s automakers have turned more optimistic these past few weeks, Supply Chain Matters remains somewhat skeptical about such optimism.  While Toyota had reduced the critical parts count to below 30, alternative suppliers and parts needed to be re-qualified.  If Toyota managed to do this in a mere few weeks, that would be a significant feat, and somewhat uncharacteristic of the rigorous standards that are a part of a re-qualification process.  All three of the major Japanese auto makers are expected to report big declines in May sales and that may also be motivating the need to provide a more optimistic picture and fend off market penetration from non-Japanese producers.

Another important factor not mentioned is the ongoing shortages on consistent electrical power across Japan, especially approaching the peak demand summer months.  While there are reports that individuals and businesses throughout Japan have come up with innovative means to sacrifice and conserve electrical power, we still wonder aloud whether optimism for near-normal supplier and final assembly factory output has been carried too far.

Only time and customers will determine whether our concerns are justified.

In the interim, we would enjoy hearing from our Supply Chain Matters readers who reside directly in the value-chains of Japan’s auto makers, or who reside in Japan.  Has the effects of the supply chain crisis really improved?  Are supplier volumes up to normal production levels?  Is the issue of consistent electrical power during the coming months been adequately addressed?

Bob Ferrari