12 April 2011 | Angeline Albert
Purchasers with Japan-based suppliers are having to action contingency plans to cope with supply chain shortages after the earthquake, says Angeline Albert
In addition to destroying thousands of lives, Japan’s earthquake and tsunami on 11 March damaged factories and roads, and resulted in raw material and power shortages.
The consequences for business have been far-reaching, from car companies temporarily halting production, to BBC buyers who are considering recycling broadcasting tape due to a shortage of fresh stock.
While the full impact on global supply chains is yet to be realised, some experts are warning that disruptions will persist for at least the next few months. So what have and can buyers do about it?
Two industry sectors particularly hit by the crisis are electronics and automotive manufacturing.
US carmaker General Motors temporarily shut down a US assembly plant due to a scarcity of components. Production at Japanese-based plants managed by Mitsubishi Motors, Toyota Motor Corporation, Honda Motor Company and Nissan were also suspended temporarily with operations affected by power and raw material shortages. Many factories shut down voluntarily to conserve energy and because it was not cost effective to keep running within shorter timeframes when power was on. Meanwhile, Japan’s largest exporter of consumer electronics, Sony, was forced to suspend operations at factories that make televisions and cameras because of difficulties procuring necessary parts.
Some 40 per cent of electronic component supply comes out of Japan, with some of the world’s largest producers of semiconductors based there. Infineon Technologies makes electronics devices such as computer chip products and sensors for the automotive industry. It purchases computer chip-making equipment and chemicals used to produce electronics goods.
Christian Rosengarten, senior director of purchasing for central services at Infineon, says his business has some back-up suppliers, but is also looking for alternative sources of supply and may look at replacing some vendors in the long term.
Elsewhere, buyers are looking to shore up supply by increasing their stocks. Paul Dethridge, purchasing manager at microscope maker Carl Zeiss NTS, says: “We’ve been warned of a possible disruption to high-spec LCD monitor supply. Our short-term steps have been to increase stocks – to purchase immediately stocks for the next four months and to approve a second source. As a supply chain management team we have set up a task force that meets daily to discuss possible high-risk suppliers.”
Other purchasers with Japan-based suppliers are gathering information to assess the extent of their supply chain risk. One of the key steps to get a handle on such situations is to try to evaluate the impact as quickly as possible and to open regular lines of communication with suppliers.
“We are in daily contact with our suppliers,” says Nigel Andrews, the BBC’s head of technology sourcing. Broadcasting tape formats are predominantly manufactured in Japan, which has left the BBC considering recycling some tape and reallocating stocks from elsewhere in the organisation.
“The BBC is treating this very seriously and is implementing a contingency plan. We have pulled together a group of key users to manage the inventory currently held by the BBC. The key factor for us is that we are managing the usage of tape and putting in place measures to reduce and restrict its usage and also to recycle, where appropriate for the intended use,” says Andrews.
He says all broadcasters have been given high priority by suppliers. There is still some product currently in transit and allocation work is still in progress. Suppliers are continuing to conduct ongoing evaluations of damaged buildings and equipment.
The company’s contingency plan is one of several measures being adopted to manage demand within its business, and is an example of how buyers can cope with supply chain problems brought about by unforeseen events.
In addition to reallocating resources, purchasers at all kinds of organisations have responded to Japan’s earthquake by strengthening demand management and restricting supplies across their businesses where necessary. They have also looked at increasing ordering of stocks or switching to alternative existing or new suppliers.
Brad Feuling of Kong and Allan (Shanghai) Consulting was in Tokyo arranging talks between US purchasers and prospective suppliers when the earthquake and tsunami hit the country. He says those buyers have since decided not to expand their supply base in Japan.
“One drive that would normally take an hour and a half took 15 hours after the quake. I saw logistics trucks stuck on roads because the highways were shut down. There is a real problem with internal logistics before you even consider transport of goods overseas,” says Feuling.
He adds that there is a major shortage of polysilicon used to make solar panel components. There are very few suppliers worldwide and most are in Japan, but current production from suppliers outside the country is increasing rapidly.
There has also been a rise in buyers moving supply operations back to China and a subsequent rise in prices charged. What’s more, suppliers are having to prioritise customer orders according to when they were placed, and how big they are.
Gartner analyst Mickey North Rizza recommends manufacturers closely collaborate with suppliers to mitigate risks and ensure vital goods are dual sourced to try to avoid complete shortages.
Documenting manufacturing processes and assets is one way of helping to speed up plant restarts says Gartner analyst Simon Jacobson. He said business continuity plans “should shift resources to flexible capacity at other sites in a cost-effective fashion”.
In cases where equipment is damaged, he says a full record of asset designs, part lists and alternative part supply sources is “critical”.
Nigel Coghlan, global procurement development manager at electronic meter maker Itron, says he knows that one key (microcontroller) supplier has been affected and that it has some products that are manufactured in the affected plants.
“There is currently enough product in the supply chain so we aren’t impacted, but they are unable to give us a long-term position on the supply as yet so we are expecting some problems."
Microcontrollers are used to control electricity meters produced by Itron. To deal with the supply risk, Coghlan says they have put together a multi-site team led by the category manager responsible for electronic components.
“The manager is collating and communicating the information from the suppliers and liaising with them constantly to get updates on the situation,” says Coghlan. “Mostly we don’t have the option to switch suppliers. For microcontrollers, for instance, once you have selected a particular manufacturer’s part it requires a redesign if you want to change it. Many of these parts are only made in one location."
He says that while Itron has not seen any disruption yet, it expects it to take effect from next month. “The general consensus is that the problems will persist until quarter three. This issue is coming off the back of a very serious under-supply situation during 2010, which the industry was just starting to come out of, so it’s likely to prolong supply issues in certain product areas."
CIPS CEO David Noble has also issued a warning: “There could be significant cost inflation for businesses in the UK, particularly when increased demand for raw materials to aid the reconstruction of Japan’s infrastructure kicks in. This is something that was seen in the aftermath of the 1995 Kobe disaster, when the Markit/CIPS PMI input price index rose to a then record high and supplier delivery times slowed significantly.”
Whatever contingencies companies have in place, they won’t know how well they work until they are tested. Daily communication with suppliers and cross-action teams is one way of managing daily events while the fuller extent of the long-term challenges is assessed.