Recent upheavals in Japan, Mideast, China highlight risks to global supply chains

WorldRecent pictures emanating from Japan have demonstrated a clarity not often found in our nightly news programs. The initial destruction caused by the 8.9 magnitude earthquake that rocked Northeastern Japan, followed by a devastating tsunami that literally washed away entire villages, followed in turn by a series of potential meltdowns in nuclear facilities near the focal point of the quake and floods, provides a clear example of nature’s ability to upend man’s best thought-out plans and preparations.

Even as the latest nuclear threat continues to challenge Japanese officials, companies across the globe are scurrying to adapt to a new set of realities.

In one of the first widely reported reactions to the crisis in Japan, General Motors announced it was shutting down a pickup truck factory in Louisiana because it was unable to get hold of crucial Japanese-made parts.

That’s only the beginning of the potential disruptions, experts says.  Japan, after all, ranks as the world’s fourth largest exporter and accounts for approximately 14% of automotive products worldwide.

According to the Wall Street Journal Japan is also a key supplier of advanced components that help fuel the booming economies of other Asian nations, including China, which specialize in the final assembly phase of manufacturing. China depends on Japan for 13% of its imports, largely capital goods such as machine tools and electronic parts for manufacturing.  The longer Japanese companies remain on the sidelines, the greater the effect on the supply chains of global manufacturers.

In the area of high-tech, Japan’s influence is even greater, notes The New York Times.  Japan produces 60% of the silicon used to make silicon chips, as well as 35% of the flash memory chips used in smartphones and table computers.  In fact, industry analysts estimate that Apple purchases as much as a third of its flash memory from Japan-based Toshiba, with the remainder sourced mainly from South Korea, the Times reports.

And while Apple likely has available inventories that will last several weeks, eventually supply shortages of crucial components could become evident as early as the second quarter, the Times article notes.

In addition, there will likely be shortages of other, secondary components — “little specialized parts without second sources, like connectors, speakers, microphones, batteries and sensors that don’t get the love they deserve” that are also made in Japan, a former Apple executive told the Times.

Meanwhile, across the Middle East, continued unrest in countries such as Libya, Yemen, Bahrain and Saudi Arabia underscore the vulnerability of the world’s oil supply to unforeseen risks.

At the same time, continuing issues related to products and materials sourced in China are leading many U.S. companies to consider other alternatives:

  • The struggle to combat the widespread piracy of products ranging from software to movie DVDs to clothing brands remains an ongoing effort.
  • Quality control problems, evidenced by reports of tainted and dangerously mislabeled pharmaceuticals, contaminated pet foods and glassware that was found to be contaminated by lead-based paint have led to widespread concerns about the safety of product supply chains.
  • In addition, ports used by many Asian suppliers are busy and overburdened, frequently causing lengthy delays in shipping and affecting supply chains and logistics schedules.

Given this litany of turmoil and particularly in view of the latest crisis in Japan and the yet-to-be-determined scale of the resulting fallout, the growing attraction of near-source countries such as Mexico, Brazil and other Latin American countries may pick up steam.

One example worth considering may be the case of Walter Meier, a manufacturer of precision tools and equipment.  Early last year, executives at Walter Meier began experiencing problems with an overseas supplier the firm had been using to manufacture a complex product line.  Production schedules were lapsing and shipping delays had increased tremendously.

Working with detailed sets of plans and specifications from Walter Meier’s designers, Source One was able to identify several potential new sources, including a Mexican-based tool manufacturer that had the creativity and technical ability to closely replicate the products made overseas.

As a result, Walter Meier was able to develop a reliable new source for a high precision product that could be manufactured in nearby Mexico at a highly competitive cost of labor, and with much less expensive and more reliable shipping and logistics schedules.

According to Steven Belli, CEO for Source One, it’s an example that other companies may want to consider.

One of the hallmarks of Japanese planning has been the concept of just-in-time inventory management as a way of minimizing costs and shipping times.  However, thanks in no small part to the recent upheavals across traditional supply chains, more companies may want to consider placing more emphasis on mitigating risk – what is sometimes called a “just-in-case” approach.

“It’s not enough to know that you have a secure source and system in place for your manufacturing  process,” says Belli.  “You also need to have the wherewithal to plan ahead to make sure that you have alternative sources available in the event the worst case scenario actually happens,” says Belli.  “And then have a backup plan in place just in case that plan fails.”

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