Fragile supply chains become challenged by natural disaster

The Japanese earthquake and its ensuing dreadful tsunami shook the world and left more than 15,000 people dead. Symbolically iPad2 sales were delayed because four core parts could not be delivered from Japan in time. More seriously affected was the automobile sector. The production schedule needed adjustment by a maximum of three months simply because the essential parts suppliers, located in northeast Japan, were seriously damaged. 

Similarly, Thailand was heavily flooded in the last quarter of 2011, and many industrial zones simply could not operate. Computer hard disks were in short supply for a number of months because Thailand is the hub of such production. This flood crisis also revealed that Sony and Nikon digital cameras are solely produced in Thailand, and the companies were forced to postpone debut sales of their latest models.

Manufacturing nowadays takes different forms and is enabled by modern technology, low cost transportation and free trade agreements (FTAs). Module production makes it possible to separate production processes and accommodate them in different locations. Prior to this module production innovation, all the manufacturing processes used to be completed in the same location. The labour-intensive processes have been moved to labour-rich and low-wage countries. These modules can be brought together to the final assembly location. A typical example of this system is the final assembly line for hard dsisks in Thailand. 

Supply chain production is basically very efficient. At the same time too, greater efficiency always means there is some sacrifice in reliability and safety. If core parts production is not only concentrated in one particular area, any production interruption because of natural disaster should only be be minor. If producers hold a sufficient number of spare parts in inventory, the production chain will not be seriously interrupted either.

Although we cannot deny the fact that supply-chain developments have produced a trend toward de facto FTAs and maximum efficiency, which substantially lowers the price of final products, there is still always uncertainty and risk.

Some automobile core parts makers stopped production due to the damage caused by the earthquake and tsunami in Japan. What surprised us at the time was the fact that not only Japanese automobile manufacturers but also those in Thailand and the US were affected because of the short supply of core parts from the earthquake-affected areas. Not many people knew that northeast Japan is such an important area for core car parts production.

In the last quarter of 2011, the floods inundated central Thailand. The worst flooding in 70 years was seen in Ayutthaya, Pathum Thani Nonthaburi and Samut Sakhon provinces and parts of Bangkok. As many as seven industrial estates, 838 firms, and 380,000 workers were affected. Production of automobiles and electrical appliances and electronics fell by almost 35 per cent. These affected areas are a major source of intermediate input producers. 

Toyota first introduced the efficient Kanban, or “just-in-time”, system, which most of the world’s supply chains now use before final assembly. The disruptions to parts and components delivery inevitably had a strong adverse effect on the non-flooded areas both in Thailand and other countries.

Thailand provides low-cost assembly bases. The final products are exported. Automotive exports recorded the most severe decline as a result of the floods: more than a 50 per cent reduction in November 2011, followed by 48 per cent for electronics and 22 per cent for electrical appliances. 

Since supply chain disruptions affect the world, we should consider ways to reduce such disruptions. One such way is “Don't put all your eggs in one basket”. In fact, some Japanese manufacturers have already moved their core suppliers to two or more new locations. This is the case with redundant suppliers. Alternatively, a redundant inventory, although more costly, can buy safety and reliability for continuous operations, to get away from “just-in-time” efficiency. 

When Japan suffered another great earthquake in 1991, the supply chain between eastern and western Japan was severed due to the destruction of highways and railways. The redundancy approach has not been taken up and we faced two major disasters in 2011. A slight move in this direction can be found in the breakup of the subcontracting system, but this is obviously not enough.

The quest for too much efficiency brought Japanese electronic giants such as Sony, Sharp and Panasonic record high losses in 2011. With strong competition from South Korea’s Samsung and LG, LCD TV prices are now very low and Japanese manufacturers can produce only at a loss. 

One bright aspect of the current supply chain disruption is the fact that Japan has temporarily opened up the labour market for skilled Thai workers. Japanese multinationals have developed with Thai human capital to such an extent that production cannot be completed without them. 

A long-term vision of training workers and taking pride in manufacturing will save our quality of life from too much competition and the quest for over-efficiency. 

 

Shigeyuki Abe teaches at Doshisha University, Kyoto, and Pongsak Hoontrakul at Sasin Graduate School, Chulalongkorn University, Bangkok.