Japan earthquake forces businesses to rethink their global supply chains

The business of shifting minute components from one place to another is not something that usually gets much attention outside of those directly involved with managing supply chains. The devastating earthquake and tsunami that struck Japan on 11 March, and the ensuing nuclear crisis, have changed all that.

The disruption caused to the production capabilities of some of the world’s leading automotive and electronics manufacturers has raised questions about the vulnerability of global supply chains. Thousands of multinational companies that rely on Japanese manufacturers for goods and services can expect disruptions that will last up to several months.

With about 20 percent of all semiconductors and 40 percent of all flash memory chips in the world made in Japan, the hi-tech electronics sector is the hardest hit, followed by the steel and automotive industries – and businesses that depend on these industries, such as producers of medical devices, communications gear suppliers, car dealerships, shipbuilders, consumer electronics and the aviation industry.

Toyota is facing a potential credit rating downgrade from Moody’s, largely because of disruptions to its supply chain. Though its factories did not suffer serious damage, shipment of key components has been disrupted forcing temporary closures of some of its factories in the UK. Meanwhile, Sony says it may be forced to delay the global release of its next-generation PlayStation Portable gaming device because of production disruptions.

However, Toyota and Sony are just two of many Japanese manufacturers whose supply chains have been disrupted by the natural disaster and its aftereffects. Steve Clayton, UK and Ireland chief financial officer at Fujitsu, says the Tokyo-based group has had to take action.

“We have shifted production from those factories in the worst hit areas to other plants in Japan that are not as badly affected,” Clayton tells Financial Director. “This has helped to maintain a good supply of components and allowed us to continue to ship products out of the country, though not at the same rate as before the earthquake.”

Under the bonnet

A major headache for finance directors in analysing their company’s potential vulnerability to such supply chain disruptions is the sheer complexity of the systems involved. For example, a recent study of the Apple iPhone by the Asian Development Bank found that manufacturing the US-designed product involves nine companies that operate in China, South Korea, Japan, Taiwan, Germany and the US.

The iPhone is not unusual in this respect. Other supply chains are just as tortuous and complicated, which can be seen in the manufacture of everything from LCD televisions and kitchen appliances to baked pastry goods. A disruption to any individual manufacturer in the system can derail the whole process.

 

 

Read our blog on Apple’s supply chain weakness at tinyurl.com/FDapple

 

The businesses that can potentially be affected by this belong to a much more varied group than the usual suspects of electrical retailers and distributors. Steve Waldron, financial controller at central London hotel chain Grange Hotels, says this can also be a problem for his business.

“We source a lot of our televisions and computers from south-east Asia,” Waldron tells Financial Director. “The supply chain out there is extremely incestuous: a lot of white goods manufactured in Malaysia rely on certain components from Korea, China and Japan. The finished product could be infringed upon by the loss of any one component.”

Waldron adds that much of the problem lies in finding out who manufactures the component parts that make up the finished product. Running an extensive risk analysis is all but impossible.

“It is difficult to drill down and see the total risk structure, simply because it is not always transparent who the manufacturers of the individual components are. It is the same with food. When you buy a chicken and bacon pie, how do you drill down and ask where the constituent parts come from?” says Waldron.

Source of supply

There are various things companies can do to protect themselves. Businesses can choose to hold more stocks and source components from a wider range of suppliers in geographically diverse locations. But these actions have their drawbacks. For instance, using more suppliers will squeeze margins by raising the cost of supply.

The increased cost of diversifying suppliers and holding more stock is more important to many FDs than the risk of increased supply chain vulnerability.

“In the past few years, businesses have had to show financial restraint, and there has been a focus on cutting costs. You try to bulk purchase to get a better deal and spend less on risk mitigation,” says Mike Hammond, chairman of insurance broker Lockton Companies.

Waldron agrees that it is common practice in the hotel industry to give exclusive rights to one supplier because it is cost effective. But when the supply chain is interrupted this strategy unravels. It is not an approach taken by Grange.

“The suppliers become complacent. The quality of service deteriorates, and there is less flexibility in a disaster recovery situation,” he says. “We always have alternative manufacturers for all our key components. When we tender for products, we look at the source of the supplier and the risk element involved.”

Clayton says Fujitsu is making contingency plans in the wake of the Japan disaster to ensure that it can source components from alternative suppliers as and when the business should need them. However, he says that the company also takes its policy of using alternative suppliers in the event of a disruption to its supply chain one step further than most.

“We have a ‘vendor-neutral’ policy that has been in place for 10 years,” he says. “While we prefer to sell our own products, we will sell components made by our competitors if that is what the customer wants and it can meet a gap in the supply chain.”

Read our blog on Apple’s supply chain weakness here