The major natural disasters of 2011—the Japanese earthquake and tsunami and Thailand floods—were a wake-up call for the electronics industry about how natural disasters can affect the availability, delivery and pricing of electronic components. Both natural disasters resulted in significant sourcing issues for buyers, with lead times stretching to 26 to 52 weeks for many components.
Even if your component supplier has global footprints for manufacturing, design and engineering, and aren't directly affected by the natural disaster or other supply chain event, their competitors may be affected, causing a rippling effect throughout the supply chain. If two or three major players are taken out of the game, then the demand gets spread across the remaining suppliers. This can result in long lead times and suppliers scrambling to ramp up production to meet the increased demand.
One way to mitigate potential supply disruptions is by having dual or multiple production facilities for all product lines, according to many component manufacturers, including ROHM, Omron and TE Connectivity. As an example, ROHM Semiconductor produces its tantalum capacitors in Japan and Thailand. Although the Japan earthquake and tsunami did not affect its production, the floods in Thailand were a challenge. The supplier said it was able to move production between the two facilities to keep everything up and running.
TE Circuit Protection, a business unit of TE Connectivity, said the tsunami and earthquake in Japan were a wake-up call for all manufacturers about how natural disasters affect the supply chain and for component manufacturers to ensure that they have contingency plans for all products.
TE Circuit Protection experienced a small delay during the Japan disaster, but it was primarily due to transportation issues. As a result, the components supplier broadened its footprint to make sure it was manufacturing locally and had contingency plans for all of its product lines. Many of TE's products are manufactured in more than one location.
Raw materials also are an area of concern, says Kent Sterrett, vice president sales and operations, ELNA America Inc., Atlanta, Ga.
“We currently use multiple raw materials suppliers, but we lost one of our Japanese suppliers for aluminum foil during the Japan earthquake and tsunami. We had two or three others that we purchased from so we just shifted our demand over to them, but so did all of our competitors,” says Sterrett. “Our purchasing managers are constantly looking for other high-quality, high-volume suppliers."
Risk mitigation, take 2
The natural disasters resulted in many electronics companies taking a second look at their supply chain risk management programs to mitigate supply risks not just caused by natural disasters, but other events such as raw materials shortages, strikes and financial actions.
“Over the past few years, we've seen a lot of suppliers and customers increase their focus on risk mitigation, whether it was due to a natural disaster or a blip in the supply chain itself,” says Jason Lipps, product marketing specialist, Omron Electronic Components LLC, Littleton, Colo. “Customers know that having a single source is not a very prudent way to do business, and many are looking to add another source on the approved vendor list (AVL) to mitigate their risk or benefit from a potential costs savings.”
A global procurement study released by A.T. Kearney in 2011 indicated that the majority of companies studied were vulnerable to major supply disruptions and did not have strategies to manage risk and avoid disruptions in their global supply chains. The Assessment of Excellence in Procurement (AEP) study also found that there was a big disparity between leading companies that are managing supply chain risk and those that don't have best practices in place to manage risk.
“Most of the disruptions that have happened in recent times have been traced back to Tier 2 and Tier 3 suppliers and not Tier 1 suppliers,” says Bindiya Vakil, CEO and founder of Resilinc.For example, 69% of AEP survey respondents at leading companies said they use risk management analysis and disaster planning/secondary supply sources, compared to 22% and 18%, respectively, for followers. Seventy-five percent of respondents at leading companies use financial risk management compared to 18% for followers.
Leaders also perform continuous risk monitoring, with 54% of respondents using this strategy to help protect against supply disruptions compared to 17% for followers.
Fast forward to 2013, a Global Manufacturing Outlook report released by KPMG indicates that manufacturers still have a long way to go when it comes to managing supply chain risk. The report finds that nearly half of the global manufacturers surveyed had no visibility past Tier 1 suppliers. Only nine percent of the respondents said they had complete visibility into their supply chains, and only a small percentage said they could assess the impact of an unplanned supply chain disruption within hours, while 36% said it could take between one to six days.
These numbers indicate that there are still a lot of companies lagging behind in putting together supply chain risk programs. But there are supply chain tools that can help. As an example, Resilinc, a supply chain resiliency solution provider, has developed a solution to help companies monitor and proactively mitigate any supply issues that may occur.
“Most of the disruptions that have happened in recent times have been traced back to Tier 2 and Tier 3 suppliers and not Tier 1 suppliers,” says Bindiya Vakil, CEO and founder of Resilinc, Santa Clara, Calif. “Most companies have a good handle on Tier 1 supply chain but not into Tier 2—who their suppliers' suppliers are and where they are located.”
Resilinc has added customers to its roster that have been hit by some big disruptions over the years, including Western Digital and EMC due to the Thailand floods and Japan disaster, explains Jon Bovit, chief marketing officer at Resilinc.
Resilinc has added customers to its roster that have been hit by some big disruptions over the years, explains Jon Bovit, the company’s chief marketing officer. “A lot of our customers are now pushing their suppliers to give them more information about their suppliers and their global supply chain dependency,” Vakil adds.
Resilinc standardized the process. The company developed a list of “core and foundational pieces of information that suppliers need to provide in order for companies to have a best-in-class program for visibility and risk management,” says Vakil. “Once the supplier provides the data, you can approve access to the information for different customers so they don't have to redo the data entry.”
Resilinc's supply chain resiliency solution is segmented into three main areas: plan, monitor, and protect. On the planning side, Resilinc provides supply chain mapping and visibility across the multiple tiers globally.
On the monitoring side, Resilinc provides 24x7 monitoring of global events through EventWatch, while the protect process helps companies mitigate, plan effectively and apply resources, particularly for critical products or parts, says Bovit. It includes a “virtual war-room” and “what if tools” to develop an impact analysis if a disruption occurs.
“We'll map a company's supply chain and engage with their Tier 1 suppliers and crawl through the supply chain globally so they can have a map of where their products, parts and supplier sites are mapped throughout the world,” explains Bovit. These include component suppliers, distributors, contract manufacturers, 3PL/LC and warehouses.
By implementing best practices for supply chain risk management, purchasers will have more time to focus on “value-added work that has long-term value to the business such as product design, supplier sourcing, and strategic relationship management,” Vakil says.