Industry left high and dry
By Peter Marsh
Published: April 12 2011 22:48
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| Stranded: a cargo ship run aground by the tsunami at the port of Kamaishi, north-eastern Japan. Supplies to global industries such as carmaking and electronics have been hardest hit by last month’s events . |
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The head of operations at Blue Coat, a manufacturer of electronic internet equipment based near San Francisco, spent an anxious 24 hours checking on how many of his company’s worldwide supply network of more than 1,000 companies would be affected. In the end, he says: “We discovered that a few dozen of our suppliers [in Japan] could have problems in making components available to us, and found alternative sources for most of the parts.”
The head of operations at Blue Coat, a manufacturer of electronic internet equipment based near San Francisco, spent an anxious 24 hours checking on how many of his company’s worldwide supply network of more than 1,000 companies would be affected. In the end, he says: “We discovered that a few dozen of our suppliers [in Japan] could have problems in making components available to us, and found alternative sources for most of the parts.”
But he sounds less assured about what would have happened if a similar shock had hit Guangdong, the southern Chinese province that is the world’s most important electronics production centre and the site of one of Blue Coat’s two main factories. “I’m not sure what we’d do,” he says. “The only compensating factor is that all our competitors would be in the same position.”
The anxiety triggered by last month’s events highlights the growing importance of supply-chain strategy to Blue Coat and countless other manufacturers worldwide. It has forced them to question the resilience of networks that have grown increasingly complex and far flung, and to look at ways of reducing vulnerability to such unforeseen interruptions.
In the past decade, many manufacturers have shifted component production to multiple contractors, often in low-wage Asian nations. This is to cut costs but it is also part of a general shift to slim operations and concentrate on what they regard as core areas, such as product development and marketing.
However, concurrent moves towards “lean production” – shaving inventories to the minimum and pushing parts through the system as fast as possible to cope with sudden variations in demand – have made supply chains increasingly susceptible to the kind of disruption seen in recent weeks in Japan.
It is in sectors such as carmaking, and the manufacture of construction equipment and electronics that the repercussions of last month’s disaster have been most marked. Suppliers in Japan – the third-largest manufacturing nation, behind China and the US – specialise in making parts hard for other businesses to create. Even for many factories not directly affected, production has been disrupted by electricity shortages, transport disruptions and the breakdown of Japanese supply chains for domestic assembly operations.
The catastrophe comes soon after similar shocks to supply chains, such as the Icelandic volcanic ash clouds that crippled crucial air freight routes last year and labour unrest at electronics production sites in China, also last year. “[The Japanese disruption] is another mega-event which forces everyone to reflect on the inadequacies of their manufacturing arrangements,” says Jochen Zeitz, chief executive of Puma, the German sports goods manufacturer.
Particularly unsettling, says Barry Tarnef, a risk manager at Chubb, the US insurance group, is that many manufacturing managers lack the information needed to mobilise alternative arrangements quickly if supply chains are interrupted.
However, room for manoeuvre – even for companies with a disaster plan in place – depends to a large degree on the nature of the industry. In electronics, about 80 per cent of basic component production, along with a great deal of final assembly, is based in China. The situation is similar for clothing and footwear. In such industries, there are few opportunities to mitigate the consequences of a disaster in south China of the type that gives Mr Cox nightmares.
But in other sectors, particularly in engineering, where expertise in production is spread more widely and pricing pressures are less intense, many companies are instituting strategies to insulate themselves at least partially. These include building several networks of suppliers in different countries. The emphasis is on shortening supply lines to make communication easier and transport less prone to disruption. The result, says Hal Sirkin, a manufacturing expert at BCG, the Chicago-based consulting group, is that manufacturers are more able to adapt factory operations to sudden disruptive events. “The goal is to make supply chains less static and more dynamic,” he says.
Bjorn Vang Jensen, head of global logistics at Swedish white goods manufacturer Electrolux, says the situation has improved. Nevertheless, he points out, some companies in a range of industries “have continued to experience difficulties getting products and materials in and out of Japan, not just in the region worst hit by the earthquake and tsunami but in other areas of the country as well”.
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According to Mr Sirkin, increasing numbers of these networks involve businesses in high-cost nations, which a few years ago might have been shunned. Behind this are two trends. Costs in China are rising, in part because of factory workers’ demands for higher wages. Also, faced with a need to become more competitive, manufacturers in high-cost nations have pushed up productivity by investing in new labour-saving machinery, for example.
“In a few years’ time, assuming current trends continue, it will no longer be necessary in a broad cross section of industries for companies in the US to outsource production [of goods to be sold domestically] to China. They will find their costs are no higher if they do the manufacturing at home,” Mr Sirkin says.
The trend towards localism in manufacturing is embodied in a gleaming new $6.8bn semiconductor manufacturing complex near Albany, New York state. The plant is being built by Globalfoundries, an Abu Dhabi-backed microchip maker with facilities in Germany and Singapore.
Benefiting from $1.2bn of US government subsidies, it is due from next year to make integrated circuits under contract for chip businesses based mainly in America that do not operate their own plants.
Globalfoundries’ chief competitor is Taiwan Semiconductor Manufacturing Company, the world leader in the microchip contracting industry. Apart from Taiwan, the leading nations providing such operations include China and Japan. In the US, however, there is currently only one high-volume plant, run by South Korea’s Samsung. Doug Grose, Globalfoundries’ CEO, says it could have built the facility “anywhere in the world”. But he says it made sense to put it in the US to reap the benefits of spreading operations widely, positioning factories close to customers in as many locations as possible.
Acme Alliance, a Chicago-based maker of castings for the vehicle industry, has blazed a trail towards setting up production chains that emphasise close connections to regional suppliers.
“If all a manufacturer based in the US thinks about is unit costs, then it’s likely to have a global supply chain in which it transports components long distances [to a US assembly facility],” says Matthew Lovejoy, Acme’s president and owner. “But once you think about all the hidden costs that such complex chains involve, including disruptions in transport, the need to vary production to meet changes in your customers’ demands, plus the impact of unpredictable events like the Japan earthquake, then you realise these kinds of networks do not make sense.”
Accordingly, Mr Lovejoy has established three supply chains – each built around Acme’s three factories in Chicago, Brazil and Shenzhen, China. Each is largely autonomous but capable of supplying components to other parts of the business in the event of a sudden, localised disruption.
For Trumpf, a German company that is the leading manufacturer of laser cutting machines, basing its operations on local supply chains is not so much a second-best alternative as an essential source of competitive advantage. Clustered around the main factory in Stuttgart are about 100 suppliers that provide specialist components.
“If you have a problem with a supplier in China then it’s likely to take weeks to sort out, while if the same thing happens with one of our local companies then we can arrive at a solution within hours,” says Mathias Kammüller, head of the machine tool division.
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Companies at the cutting edge of supply-chain planning have set up data systems to complement their multiple networks. These enable them to remain abreast of problems in various locations, using spare capacity from plants elsewhere to provide extra parts. Swiss-Swedish industrial group ABB has 5,500 suppliers linked via data networks and transport connections to assembly factories spread globally. Control of the flow of parts is devolved to 450 supply chain experts based in 40 countries, who ABB feels are best placed to match supply to fluctuations in local demand.
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SKF of Sweden, the biggest maker of industrial bearings, places a similar emphasis on adaptability. It last year purchased parts and materials worth about $5bn from more than 2,000 suppliers, in an exercise co-ordinated by 1,000 supply planners in Belgium, Singapore and Tennessee. Backing these operations are 200 people based in Gothenburg, Shanghai, Mumbai, and Chicago who handle global logistics.
Bo-Inge Stensson, SKF’s vice-president for purchasing, says: “We have a special data network that allows us to track the progress of a single part all the way through the manufacturing system until it ends up in a finished product. We can use this to react in as timely a manner as possible to disruptions that may affect different parts of our operations.”
The lesson for industry from the Japanese disaster is that the consequences of such events on the global production system are always likely to be considerable. There are ways to reduce the sensitivity of supply chains to the effects of such incidents, through better planning and more distributed operations, but too few companies are taking advantage of them.
“There’s no reason to think the trend towards more unforeseen events [affecting supply chains] is going to end,” says Mr Stensson. “If companies are serious about trying to minimise the impact of these events, they will have to do more to prepare themselves.”
SHIPPING
After the downturn, a reformed industry copes with its first severe test
When Denmark’s Maersk Line, operator of the world’s largest container ship fleet, was introducing its E Class ships – the world’s biggest container carriers – in 2006, it ordered eight vessels, writes Robert Wright. It planned to run weekly services between Asia and Europe, with each circuit lasting 56 days. But when it announced plans in February to buy still-bigger ships, the initial order was 10.
With ships now sailing more slowly to conserve fuel, the Asia to Europe and back journey takes 70 days and 10 ships are needed to maintain a weekly service.
The slowing down of ships is one of a series of changes to supply chains in the wake of the economic crisis. Many of the shipping lines' customers also now hold far less stock and rely more on punctual deliveries to keep shops and factories stocked, according to logistics companies. The experience of being left holding huge quantities of unsaleable stock when the downturn struck in late 2008 has left them wary.
Last month’s Japanese earthquake and tsunami have posed the ability of the new systems to cope with serious upheaval with their first major test.
In general, the system has coped – partly because, while ships have slowed down, deliveries have grown more reliable. Most ports no longer suffer the severe congestion that delayed goods at the height of the economic boom. Ships that are sailing more slowly also have more scope to increase speed and catch up with schedule if delayed.
There have been problems, however. “The only real interruptions we have noted were ... with the Japanese automotive manufacturers,” says Bruno Sidler of Amsterdam-based Ceva Logistics. This, he believes, is because they lack alternative sources for crucial components. “They rely to a large extent on supplies of parts being produced in Japan,” he says.
There has also been concern for manufacturers reliant on semiconductors, a field in which Japan has significant market share. But here, says Mr Sidler, manufacturers found other sources: “The Taiwanese and Koreans have, of course, happily stepped in.”
To judge by the relatively small number of factories so far forced to close worldwide, he insists, the shipping industry has passed the test reasonably well.
.After the downturn, a reformed industry copes with its first severe test
When Denmark’s Maersk Line, operator of the world’s largest container ship fleet, was introducing its E Class ships – the world’s biggest container carriers – in 2006, it ordered eight vessels, writes Robert Wright. It planned to run weekly services between Asia and Europe, with each circuit lasting 56 days. But when it announced plans in February to buy still-bigger ships, the initial order was 10.
With ships now sailing more slowly to conserve fuel, the Asia to Europe and back journey takes 70 days and 10 ships are needed to maintain a weekly service.
The slowing down of ships is one of a series of changes to supply chains in the wake of the economic crisis. Many of the shipping lines' customers also now hold far less stock and rely more on punctual deliveries to keep shops and factories stocked, according to logistics companies. The experience of being left holding huge quantities of unsaleable stock when the downturn struck in late 2008 has left them wary.
Last month’s Japanese earthquake and tsunami have posed the ability of the new systems to cope with serious upheaval with their first major test.
In general, the system has coped – partly because, while ships have slowed down, deliveries have grown more reliable. Most ports no longer suffer the severe congestion that delayed goods at the height of the economic boom. Ships that are sailing more slowly also have more scope to increase speed and catch up with schedule if delayed.
There have been problems, however. “The only real interruptions we have noted were ... with the Japanese automotive manufacturers,” says Bruno Sidler of Amsterdam-based Ceva Logistics. This, he believes, is because they lack alternative sources for crucial components. “They rely to a large extent on supplies of parts being produced in Japan,” he says.
There has also been concern for manufacturers reliant on semiconductors, a field in which Japan has significant market share. But here, says Mr Sidler, manufacturers found other sources: “The Taiwanese and Koreans have, of course, happily stepped in.”
To judge by the relatively small number of factories so far forced to close worldwide, he insists, the shipping industry has passed the test reasonably well.
KOBE COMPARISONS
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Last month’s disaster in Japan drew inevitable comparisons with the effect on manufacturing of the 1995 Kobe earthquake. That event sparked concern about the resilience of global supply chains based on the “just in time” system pioneered in 1970s Japan, whereby manufacturers kept inventories low and and ordered parts at short notice. Today, however, the potential disruption to global manufacturing from single large shocks is much bigger. Products are more complex, with components made in many more countries. Another change is the ascent of China, which accounted for 5 per cent of world manufacturing output in 1995 compared with 20 per cent 2010. This has fuelled fears that if a big disruption hit China, the impact could be considerable.
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Last month’s disaster in Japan drew inevitable comparisons with the effect on manufacturing of the 1995 Kobe earthquake. That event sparked concern about the resilience of global supply chains based on the “just in time” system pioneered in 1970s Japan, whereby manufacturers kept inventories low and and ordered parts at short notice. Today, however, the potential disruption to global manufacturing from single large shocks is much bigger. Products are more complex, with components made in many more countries. Another change is the ascent of China, which accounted for 5 per cent of world manufacturing output in 1995 compared with 20 per cent 2010. This has fuelled fears that if a big disruption hit China, the impact could be considerable.
Copyright The Financial Times Limited 2011.
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