Workers at Japanese hard-drive maker Nidec Corp.’s plant in Thailand have a remedy for the flooding that has shut 1,000’s 
of factories there. They use narrow wooden boats to ferry boxes of delicate motors across a flooded plain to a truck that will haul them to Bangkok. But The Wall Street Journal (Nov.3, 2011) asks: “Are the companies to blame for some of the economic costs of the disaster”? Some experts say, yes, that flooding in Thailand should serve as a warning to companies world-wide: thin supply chains for critical components are vulnerable to disasters.
“Companies never see the big picture, and see where the potential problems in their supply chains might be; and this is especially true as these supply chains become more geographically dispersed”, says a McKinsey & Co. partner. Thailand’s flooding (as did Japan’s earthquake) has ricocheted around the world in ways few businesses expected. For example, about 1/4 of the world’s hard-drive output is under water. And Honda’s main Thai plant is semi-submerged, choking off the supply of key components to factories around the world. (The Honda factory in Brazil is cutting production by 1/3). In all, 7 of Thailand’s industrial parks are flooded.
Supply chain experts say much of the disaster “could have been averted if companies themselves hadn’t been so focused on saving money by using lean supply chains”. In a country prone to major flooding, insurers may now be reluctant to offer coverage, forcing manufacturers to move out. Nidec has already announced plans to transfer some output to the Philippines and China, even as its workers in Thailand paddle out to salvage what they can from the plant.
Discussion questions:
1. Discuss the danger in “thin” (lean) supply chains.
2. What is the solution for the OM manager?
The Thai flooding tragedy is another example of the need for adequate risk management as an integral part of supply chain management. “Thin” or “lean” or “closed” supply chains have been talked about recently as being prone to outages both small and large. There is a certain risk profile associated with a host of potential supply chain outages. Some companies understand the risk and are willing to take it; others do not understand the risk and are surprised when it manifests itself.
Furthermore, this is not just an example of multiple supply chains that are dependent on a single source of supply (such as the proprietary shiny pigment paint used by automotive OEMs in the Japan tsunami tragedy), but that multiple supply chains in multiple industries set up sources of supply in what now appears to be a high risk location. As companies set up their source of supply in this location, infrastructure was built and local expertise grew, thus attracting more companies. Perhaps new companies built sources of supply simply because other companies had done so (and the cost structure was good), without considering the risks. This herd mentality needs to be questioned as part of a robust sourcing strategy.
This also calls for more seamless integration of procurement and supply chain into a supply chain engineering capability that looks at a host of variables to arrive at the “best landed cost,” where risk is considered and monetized as a cost. Additionally, if a risk is understood and taken, the company should construct a process playbook that is run in the event that the risk manifests itself. In other outage situations, companies that had process playbooks were able to quickly react and set up alternate sources of supply to the disadvantage of their competitors.
The bottom line is that too many supply chains are constructed and managed exclusively around “known knowns.” Proper risk management for today’s world requires companies to evaluate their supply chain structures for “known unknowns” and “unknown unknowns.”
Kelly Thomas
Senior Vice President, JDA Software