Natural Disaster – Thailand Floods Disrupt Auto Supply Chain

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SUMMARY:  Flood-stricken Thailand is now being hit by the same kind of supply-chain disruptions that plagued Japan’s economy in March after the devastating earthquake and tsunami.

STORY LINK:  Wall Street Journal

Analysis by Wally Buran, Firestorm Supply Chain Expert Council Member

The floods in Thailand are a major human crisis, but are likely to become an even larger business and economic crisis for a number of companies.  This one will cost thousands of jobs beyond Thailand and hundreds of millions in revenue and profit losses for the companies dependent on suppliers located in Thailand. For some the flooding may become a major business crisis that will last for years. Think back to the Ericsson / Nokia experience.

On March 17, 2000, a small fire at a Philips semiconductor plant occurred in Albuquerque, New Mexico. Philips was a supplier of mobile phone chips to both Nokia and Ericsson, and was under contract to supply both with new generation chips for their new mobile phone products.

The fire was out in less than 15 minutes and damage initially appeared minimal. Ericsson and Nokia were informed the next day of the fire and told that disruptions would be minimal. Unfortunately, the fire had contaminated the factory and its clean room production facilities, and the plant actually required several months to return to full production. So far in this case, it  appears to be an unfortunate accident that was unforeseen and both customers were affected roughly equally.

Events proved differently.

Critical Supplier Analysis Preaction

Nokia was aware they had a critical supplier and owner of key intellectual capital in their next generation products and monitored the situation closely. They also ran projections that showed they would be very likely to run short of chips required for the launch of their new phone products and quickly worked with Philips and other suppliers to establish and integrate alternative sources of chips into their products and launch plans.

Ericsson did not react immediately, did not monitor the supplier situation, did not evaluate potential impacts and did not begin contingency planning. Several weeks later when they became aware of the escalating chip shortage, they discovered that much of the excess capacity in the industry had already been taken by Nokia and others.

The results were dramatic. Nokia launched their next generation phones very successfully, grew market share and earned greater profits than anticipated. And they sustained their share gains over several years.

Ericsson sustained a major loss in their mobile phone division and their market share dropped from 12% to 9%. Even worse, Ericsson had to delay introducing their new generation handsets into the marketplace and lost their technology edge in the minds of their customers and potential customers, and suppliers who controlled much of the intellectual property of their products. Several years later, Ericsson has still not recovered their industry position, lost significant profits needed to fund their on-going technology development efforts and suffered margin erosion.

Lessons from Nokia / Ericsson

 

 

    • Your suppliers are a critical part of your supply chain AND product development process

 

    • You may not own your suppliers, but you had better view them as an integral part of your company and monitor and manage them as if you did own them

 

    • Understanding and mapping the interactions within your supply base including suppliers is as or more important than your internal operations

 

    • Visibility into key supplier performance and the ability to evaluate and simulate disruptions and constraints is often more important than your internal operations planning processes

 

    • Second and third derivative impacts of supplier disruption often affect customers much more than the companies suffering the disruption

 

  • Risks matter, can be either an opportunity or a disaster, they are seldom neutral

These lessons are critically important for most US companies. Today, the average US company produces less than 20% of the products they sell, controls less than one-third of the intellectual capital of their products and depends on suppliers globally for much of their purchased materials.

This is a much more connected, efficient and risk diverse operation environment. It is a far different management challenge than the one of just 25 years ago. Engineers and procurement executives know this, but are generally not aware of the aggregate impacts of their individual decisions regarding suppliers, particularly risks.

Few other executives in the company are aware of this dependency and even fewer have the strategies, systems and processes to support this new business model. Fixing this gap is not overwhelming, does require new thinking and experience, but generally enables higher margins in the process. But companies must develop the correct perspective and implement focused and cost effective solutions for this new management era.

In short, what you don’t know can hurt you, and generally will. If you do know, you can turn unforeseen events into value rather than a crisis. Where and when is the next Thailand, Japan, or Supplier fire. It will occur; will you be ready.

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