Preparing for Disruption

On Sunday, July 31, 2011, Tropical Storm Nok-Ten made landfall in northern Vietnam, and quickly entered northeastern Thailand. The flash flooding that would begin across Thailand’s northern regions soon would spill onto the lower central provinces, fed by weeks of winter monsoon rains. Even after most factory production already had ceased because of labor, power or port disruptions, the failing of protective barriers surrounding key industrial estates would result in dozens of major factories being inundated with destructive water and debris, adding time and cost to post-flooding start-up.

By the time the waters receded, nearly 900 persons had died, millions of others were left homeless, and Thailand’s economy was rocked to a tune of some $45.7 billion in losses.

The financial ripple effect to other countries hit with tsunami-like consequences as the automotive and consumer electronics industries wrestled with disruption of Thai-produced parts and components. Japan’s economy shrank 2.3 percent in the last quarter of 2011 because of lost production at Sony and Honda.

On the electronics side, a case in point was the disruption of hard disk drives, 40 percent of which are produced in Thailand. Hardest hit was Western Digital, the world’s largest HDD provider, which produces approximately 60 percent of its HDDs and components — mostly for the personal computer market — in Thailand.

The disruption required many manufacturers to scramble to find alternative sourcing while issuing potential profit warnings to stockholders. Pace, a manufacturer of set-top boxes, dismissed its CEO as a result of HDD shortages. Other material disruptions included chips and sensors such as those used in Apple’s iPhone, as well as electrical components and equipment sourced from Samsung and Motorola.

Although this flood certainly ranked as one of the worst in decades, the problem of flooding in Thailand is hardly a new one. To the contrary, for a country subject to perennial monsoons where the annual regional rainfall averages 45 inches, the question isn’t whether it will flood in Thailand, but how much. Experts also predict Thailand’s flooding woes are likely to worsen because of climate change, rising sea levels and the continued development of the country’s coastal urban areas.

Despite so much certainty for disruption, Thailand continues to thrive as a major high-tech producer. This dichotomy has fostered interesting studies in disruption planning and preparedness for manufacturers and suppliers that underscore the simple critical need for contingency planning and preparedness.

One positive example is Hutchinson Technology, a major supplier of HDD drive suspensions for Western Digital, whose operations in the Rojana Industrial Park were suspended because of flood-related power outages. By having a contingency plan that included shifting additional capacity to its assembly plants in the U.S., combined with tapping into pre-planned inventory stockpiles, Hutchinson Technology was reportedly able to continue to meet all of its customer’s production demands. 

Still, many companies lack this level of planning for known, high-probability risks, let alone for disruptions due to the occasional earthquake, volcanic eruption or port strike. One senior director offered his own interesting analogy: “Companies don’t think twice about the cost and effort required to back up their business records as part of sound data contingency planning, yet display a surprising lack of concern for protecting critical materials and/or production.” 

Forced to select a single overarching reason to explain this, I’d have to choose “cost,” defined as the investment in personnel resources necessary to develop the required modeling, analysis and supporting processes, together with the political will to secure pricier alternative-sourced materials and carry additional inventories.

Instead, many companies make the conscious business decision to focus solely on pricing, which often requires placing all of one’s proverbial purchasing eggs into a single supplier basket, and hoping for the best.    

One best-in-class example of a risk modeling tool I’ve seen is designed to allow corporate planners to compare multiple countries based on a wider range of considerations beyond pricing alone. To gain a more complete and accurate assessment, the tool scored a multitude of factors, including weather; ports and transportation infrastructure; freight/supply chain; trade and customs; duty/tax; geopolitical stability; energy; an available work force; and business complexity. The results were always interesting and often surprising.

Unfortunately, although proactive disruption planning and preparedness activities are too often short in supply, 20-20 hindsight and corrective action after an event always seem abundant. But as one risk analyst summarized, “Studies don’t trigger action. Floods trigger action.”

Jerry Peck is a licensed customs broker and Global Trade Management expert with more than 30 years experience in regulatory compliance and GTM optimization solutions. Contact him at wgpeck@global-trade-ms.com, or at 469-235-5229.

 

 

For the full story: Log In, Register for Free or Subscribe