Japan and the global supply chain: Broken links | The Economist

Japan and the global supply chain

Broken links

The disruption to manufacturers worldwide from Japan’s disasters will force a rethink of how they manage production

Mar 31st 2011 | TOKYO | from the print edition

LAST year Iceland’s volcanic ash disrupted air transport across Europe and gave the world’s manufacturing supply chain one of its biggest tests since the advent of the low-inventory, just-in-time era. Now, Japan’s quadruple disaster—earthquake, tsunami, nuclear alert and power shortages—has put the supply chain under far greater stress. Three weeks after the massive quake, the extent and likely duration of the disruption are still unclear.

There are some enlightening similarities between the shocks that manufacturers are now suffering and those that buffeted the banking system in the 2008 financial crisis. In both cases two of the biggest surprises were the unexpected connections the crisis uncovered, and the extent of the contagion. The problems began in a seemingly well-contained part of the system—subprime mortgages in the case of finance, in manufacturing’s case a natural disaster in an economic backwater—but quickly spread.

Like the sudden evaporation of liquidity that the banks experienced, factories are finding that parts that had always turned up reliably have stopped coming. As with financial regulators’ discovery of how poorly they understood the “shadow banking” system and arcane derivatives contracts, manufacturers are discovering how little they know about their suppliers’ suppliers and those even farther down the chain. When Lehman went bust, other banks struggled to measure their exposure because Lehman turned out to be not a single institution but a tangle of many entities. Assembly firms are now finding that their supply chain looks much the same.

Just as some financial institutions proved “too big to fail”, some Japanese suppliers are now revealed to be too crucial to do without. For example, two firms, Mitsubishi Gas Chemical and Hitachi Chemical, control about 90% of the market for a specialty resin used to bond parts of microchips that go in to smartphones and other devices. Both firms’ plants were damaged. The compact battery in Apple’s iPods relies on a polymer made by Kureha, which holds 70% of the market, and whose factory was damaged.

Manufacturers around the world are now racing to secure supplies of the scarcest components and materials, pushing up their prices. Carmakers in Japan and America have had to scale back production. Toyota fears a scarcity of 500 rubber, plastic and electronic parts. It is not yet clear how much worse things will get as existing stocks run down. Nor can Japanese suppliers be sure yet of how soon they can get back up to speed: hundreds of aftershocks, some strong enough to disrupt production, have rumbled on since the main quake. Given the loss of a very large nuclear plant and shutdowns of others, power shortages may extend for years.

Even before the extent of the disruption becomes clear, it seems certain that Japan’s disaster will have a lasting impact on how manufacturers manage their operations, says Hans-Paul Bürkner, boss of the Boston Consulting Group, who was in Tokyo this week. “It is very important now to think the extreme,” he says. “You have to have some buffers.”

Over the past decade or so the just-in-time concept of having supplies delivered at the last minute, so as to keep inventories down, has spread down the global manufacturing chain. Now, say economists at HSBC, this chain may be fortified with “just-in-case” systems to limit the damage from disruptions.

For instance, suppliers who have near-monopolies on crucial parts and materials may be pressed to spread their production facilities geographically. Their customers may, as a precaution, also switch part of their orders to smaller rivals. Hiwin, a Taiwanese firm with 10% of the market for “linear motion guides”, used in industrial machines, may gain share from customers of Japan’s THK, which dominates the market with a 55% share and which faces power cuts, suggests CLSA, a stockbroker.

Assembly firms will be under the same financial pressures as before to keep their inventories of supplies down. So a new growth industry may emerge from the crisis: that of holding and maintaining essential stocks on behalf of manufacturers.

Industrial firms, having spent years becoming ever leaner in their production techniques and, in the process, making themselves more vulnerable to these sorts of supply shocks, will now have to go partly into reverse, giving up some efficiency gains to become more robust. One consolation is that their problem of “too crucial to do without” suppliers looks a lot easier to solve than the conundrum of the “too big to fail” banks.

from the print edition | Business

What I see is a movement from centralized action and globalization to distributed activities and localization.

But this would have many possible implications and ramifications, which are as follows:

1. Centralized manufacturing operations and distribution would be increasingly costly and therefore present manufacturers would be forced to cut down on their scale of operation and grow smaller rather than bigger catering to a smaller geographical areas.

2. Buying raw materials from distant lands to manufacture goods in another place might no longer prove cost effective or competitive.

3. In the face of growing uncertainty suppliers would not like to enter into any long term contract with manufacturers. If this happens, concepts like JIT (just in time) and Lean Manufacturing that have dominated the manufacturing world for the last 30 to 40 years would go for a toss.

4. Systems would not only be designed for failure free operations but also for fail safe operations.

5. The stranglehold of monopoly would be broken opening up local competition. The theories of competitive advantages would have to be reexamined and probably discarded.

6. The trend would be towards creating more local jobs and development of local skills.

7. With such global movements taking place design of products and services would be more culture based rather than global standardization. Ref: Culture Based Design — For Sustainable Economy http://ow.ly/4pdbJ

8. The mantra would be more of Go Local: Think Global — a move towards more sustainable and energy efficient manufacturing, where the operations would be more distributed and collective than centralized and monopolistic.

9. The power of money alone would not determine the outcome of the game. Much would depend on the creative intelligence of the collective a phenomenon which traditional manufacturers have shunned for so long.

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