Extra-Natural Disasters

Bruce Rayner, Contributing Editor, Enterprise Efficiency OEM | 11/2/2011 | 3 comments

Bruce Rayner
The flood making its way through the streets of Bangkok is just the latest in a string of catastrophic weather events that have occurred over the last few years. From Russia's heat wave last summer, to the droughts in China and the US Southwest, to Australia's devastating floods earlier this year, weather is becoming more than just something to put up with.

For businesses that have grown dependent on a global supply and logistics network, it's becoming downright expensive and risky. Indeed, the US alone had 10 weather events in 2011 that caused over $1 billion a piece in damages. That's the highest annual number since records have been kept starting in 1980. Extreme weather, climate experts suggest, is the new normal.

If you're an electronics OEM, you'd be wise to heed the warning in this suggestion. Thailand's plight gives plenty of evidence for why it's a prudent course of action. The country was an early favorite for Western companies when the low-cost manufacturing trend began to take off in the 1980s. In recent years, it's been eclipsed by China and smaller rivals such as Vietnam, but Thailand remains an important hub for disk drive manufacturing, second only to China, as well as for many other electronics components. It's also a center for laptop manufacturing. Seagate, Western Digital, Sharp, Toshiba, Panasonic, Asustek, Compal, Lenovo, and Quanta all have operations in Thailand.

Then there's the auto industry. Thailand is an Asian manufacturing center for the likes of Honda, Toyota, Ford, and others. Many of these companies' factories are in the path of the floodwaters, and the implications for the global supply chain are ominous.

It's estimated that more than 400 automotive and electronics manufacturing operations in six industrial parks north of Bangkok have been affected by the floodwaters. One source quoted an economist who put the total damages from the flooding at nearly $10 billion. About 700,000 people are temporarily out of work. In all, over 400 people have died in the flood to date. Manufacturing has been halted at Honda Automobile's motorcycle and power-parts operation. And Mazda, Nissan, Toyota, and others are all reporting supply chain disruptions. Western Digital has shut down all its disk drive factories in Thailand. Seagate reports its operations are open but it's facing supply chain delays.

While it's projected that the inventory of hard drives now working its way through the supply chain is sufficient to last until the end of November, prices are already on the rise. One source was quoted as saying that disk drive prices have increased by between 20 and 40 percent.

The financial fallout may be most pronounced in Japan where companies are still reeling from the devastation caused by the March tsunami and subsequent nuclear disaster. The flood is expected to turn modest gains for many recovering Japanese companies into losses for the fiscal year.

What does this sad tale tell us about supply chain management? Well, for starters, don't put all your eggs -- or in this case, disk drives -- in one basket: for key components, try to establish regionally diverse sources. Next, know where your parts originate. I wrote a blog a couple of weeks ago about conflict minerals and the expected rollout of a new rule that requires companies to identify if their materials came from the Democratic Republic of Congo. The rule will be a pain in the neck for companies to implement, but it makes sense to know where your parts come from in the context of dealing with disasters like the Thailand flood. This is true especially if you think that these extra-natural disasters could be getting more frequent and perhaps more pronounced.

View Comments: Newest First | Oldest First | Threaded View
Henrisha   Extra-Natural Disasters   11/8/2011 2:34:47 AM
Re: Extra-Natural Disasters
Insightful. And I believe things might continue as they are or might worsen since few are taking action to deal with the effects of global warming and climate change. It's sad that Thailand may end up having to deal with more losses than the damage the factories have incurred because of the flood--such as the possibility that some firms might choose to move out and do their manufacturing work in another country.
Gigi   Extra-Natural Disasters   11/2/2011 11:03:10 PM
Gigi
Re: How much should you shift those eggs around?

Bruce, you are right. Natural calamities are hitting different parts of the world at different time. Hurican in US, Flood in Thailand, Tsunami and earth quake in Japan, Heat wave in Russia, volcanoes in Korea etc are some of the examples. So, all the countries are affecting by these types of natural disaster in or another form and intern the national economic condition too. I don’t think there is any particular solution for this; the only think is if the disaster is seasonal (Rain, storm, Heat wave etc), take necessary precausions.
Sara Peters   Extra-Natural Disasters   11/2/2011 7:00:30 PM
How much should you shift those eggs around?
All of what you say makes perfect sense, Bruce. I worry though that when some companies "temporarily" move their business out of one devastated region -- so that their entire supply chain doesn't break down -- they'll never move that business back again, after the crisis is over. Do you have any information about that, Bruce? Do you think Thailand, for example, will ever regain business it's recently lossed?


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