Top 10 Global Supply Chain Shocks

Perhaps because they are generally unpredictable and uncontrollable, natural disasters would seem to top the list of events that could deliver the most destructive shocks to the global economy and the electronics supply chain. Empirical evidence indicates this may not be the case, however.

A compilation of the most severe historical shocks to the world economic system over the course of the last 40 years indicate human activities such as war, and economic and financial disasters are not only more difficult to predict and implement remedies against, but often have a longer lasting impact on businesses and society.

With regional economies even more tightly linked, threats in one part of the globe tend nowadays to have exponential effects in other regions and the immediate effects can often be felt within days if not hours. Preparing for these “unknowns” has become a full-time, best practices job for leading electronics manufacturers. While most manufacturing sectors of the global economy are at risk from supply chain shocks few are closer to the frontline than the electronics segment.

Design, product conception and new product introduction activities may start in one part of the globe – the United States, for instance − but the purchasing, procurement and manufacturing functions are often handed over to other regions for fulfillment with logistics given the task of assuring a seamless transfer of finished goods to the final point of sales. The coordination of warranty fulfillment, repairs and other after-sales service activities is also open to disruptions, according to observers. The network of activities has in the past been disrupted by our Top 10 Supply Chain Shocks. The list follows with more detailed discussion in future articles:

1973 World Oil Crisis
Kobe Earthquake, Japan, 1995
2000-2001 Electronics Demand-Supply Imbalance
Dot.com Implosion in 2001
Japan's Lost Decade & Decades-Long Recession (1991-2000)
U.S. Sept. 11, 2001 Terrorist Strike
2008 U.S. and Global Financial Meltdown
Japan's 2011 Earthquake and Tsunami
Thailand's 2011 Flooding
Europe's Ongoing Fiscal/Debt Crisis and Economic Slump (2008-present)

This is not a comprehensive list and it’s even subjective because the impact of supply chain shocks are typically unevenly felt by industry and economic players. Natural disasters such as the earthquake and tsunami that hit Japan in 2011 and the flooding in Thailand during the same year are often generally less disruptive than initially imagined and their effects turn out to be less pronounced and much easier to overcome than man-made events.

Recent research reports and anecdotal evidence from the electronics industry indicate manufacturers are typically better prepared for systemic shocks from natural disasters, but are more significantly impacted by and less prepared for disasters resulting from human economic and geo-political activities.

In a research paper titled "The Impact of Supply Chain Disruptions: Evidence from the Japanese Tsunami," Attakrit Leckcivilize concluded that the 2011 earthquake and tsunami in Japan disrupted the global automotive supply chain, but noted the effects were mainly “transitory” and quickly evaporated as automakers and suppliers implemented recovery plans. A large segment of the industry was able to resume operations within months while the entire Japanese auto industry regained its previous ranking within one year. Other residual effects on the labor market locally and elsewhere also quickly dissipated, the researcher said. Leckcivilize states further in the report:

In examining the Great Tohoku Earthquake and Tsunami as an external shock to Japanese auto makers in the U.S., this paper has found relatively small changes in response to such an abrupt yet transitory international supply shock. The level of labor inputs was not significantly reduced among Japanese companies and their local suppliers, whereas their competitors (particularly, plants in the U.S. and German parts and engines plants) seemed to adjust their labor inputs slightly to capitalize on Japanese losses.

On the contrary, man-made disasters have longer lasting effects on the global supply chain and recovery periods can extend over many years because of the huge uncertainties, erosion of trust, and widespread destruction left in their wake. The effects of the Sept. 11, 2001 terrorist attacks on U.S. airlines and cities, for example, are still being felt across the global economy more than one decade after the event. Some of the resulting responses from governments and regulatory authorities have added to manufacturers’ cost and imposed heavy burdens on the shipment of goods, services and capital.

Shocks and After-shocks

The U.S. financial meltdown in the last decade also impacted manufacturers globally and its effects on the major supply chain hubs have been amplified over time by remedial actions that continue to linger years after the regional economy pulled out of the recession, continuously delaying, and even permanently, impacting the quick and successful rebuilding of the supply chain networks. Additionally, the fickle nature of human relationships, the unpredictable nature of enterprises, and consumers' reactions to supply chain shocks combined with government actions can make it difficult for businesses to restore confidence in the system, industry observers said.

One pertinent example comes from the mandatory budget cuts being implemented by the U.S. government, which Robert Stevens, the ex-CEO of Lockheed Martins, told analysts during a conference call could put “significant shocks” on the defense industrial supply chain, according to a Reuters news report. "We're still struggling with exactly how this will impact our business. We are very concerned about the supply chain, particularly small disadvantaged minority-owned businesses at what we regard as the edge of that supply chain," Stevens said.

Over the course of the last several decades, manufacturers in widely dispersed industries like the electronics industry that have operations in areas prone to certain types of natural disasters – earthquake prone Taiwan, for example, which harbors some of the industry’s critical semiconductor wafer foundries and printed-circuit board vendors − have put in place redundancies to offset the effects of a major calamity.

Most of the companies likely to be impacted by a disaster in Taiwan and other countries or regions identified as critical to the electronics supply chain have worst-case scenario contingencies in place to mitigate the effects of such an incident. What they may be unable to predict and quite unlikely to offset would be the implications of a war breaking out between China and Taiwan.

Yet such shocks to the world’s supply chain are not improbable. They are quite unavoidable and often are only just around the corner. The Top 10 Supply Chain Shocks listed above had significant impacts on the global supply chain but were a mixture of natural and man-made events. By reviewing these events, including their impact on the global economy and lingering effects they have on manufacturers, it may be possible to build more resilient supply chains.