Risk-Management Reminders from Japan

I recently had a conversation with Wade McDaniel, vice president of supply chain solutions for Avnet Velocity. The discussion was centered on the many layers of risk management, and a few things stood out from a presentation McDaniel provided. It was a map of earthquake-prone areas of the world.

The image stands out in my mind for a couple of reasons: first, Japan has suffered another series of devastating earthquakes and loss of life. The second is I’ve been hearing a lot about supply chain processes, systems and software that make many aspects of the supply chain virtually risk-proof.

Every once in a while the electronics industry is reminded that, while technology concepts, practices, programs and software have improved supply chain performance significantly, the manufacturing, storage and transportation of physical goods – hardware and components – still plays a large part in supply chain management. If your factory, warehouse, transportation systems and energy sources are all down, there’s not much software can do. Worse, if loss of life is involved, all perspectives change.

The first element in McDaniel’s risk mitigation presentation is “The Physical.” Borrowing a phrase from comedian George Carlin, McDaniel talks about “stuff.” Companies have to think about where their stuff is, where it’s going, who owns it, and where it’s made.

The next layer is “The Financial.” How much does a company have invested in stuff? How dependent is your business on this stuff? Are the suppliers you need for your stuff financially stable? And how about your customers?

Finally, there is an area of risk that McDaniel categorizes as “Logical.” These are the rules, regulations mandates and practices that companies have to adhere to. In the electronics industry they include RoHS, WEEE, corporate social responsibility (CSR) and trade regulations. Any one of these items can disrupt a business and possibly tarnish a reputation.

So where does that leave the electronics supply chain? Are businesses going to start moving facilities out of earthquake-prone areas? Are companies going to start selecting suppliers based on their global footprint? One of the examples McDaniel gave was an OEM that wants to diversify its semiconductor supply base so it’s not concentrated in Taiwan. Can the typical semiconductor customer – meaning a brand that is not Apple, Dell, Samsung or another Fortune 1,000 manufacturer – tell TSMC where it should locate its fabs? The safe guess is “no.”

There is of course no perfect solution. Prioritization of suppliers is a step in the right direction. Are the products you are concerned about customized for your company? Are they sole-sourced? Are they general purpose? Critical you your revenue? Critical to your service needs? These should be the focus of your risk-management measures.

There is a segment of the electronics supply chain that can significantly reduce much of the risk that’s associated with physical goods, and that’s electronics distribution. A recent analysis by EPSNews of the Top 50 distributors headquartered in North America (to be published in May) found many are global; many have facilities and warehouses around the globe; and all of them have significant relationships with electronics component suppliers.

Now that the electronics supply chain has embraced lean, JIT and BTO, components are pipelined through the supply chain—they’re not built and stored until somebody needs them. In a sense, most of the components in the supply chain are “spoken for” before they are even built: distributors aggregate orders from their customers and share that forecast with suppliers. Suppliers build parts based on the forecasts, and then if all goes well they ship the parts out the door for delivery to the end customer.

Distributors receive them, store them, break down large volumes, package them, label them and ship them on demand. These distributors are also significant customers to logistics providers such as FedEx, UPS, DHL and dozens of local logistics companies around the world. One of the functions they perform during a service disruption is diverting shipments when they can. Distribution played a big role during the West Coast seaport strikes by diverting shipments that were bound for California to alternative destinations.

There’s a segment of distribution that deals almost exclusively with finished goods. In many cases these components are considered excess because some OEM or EMS overestimated demand. Some of these distributors take on the financial risk of procuring those parts; others facilitate transactions between sources of supply and buyers that need devices. These transactions carry less counterfeiting risk than they used to as some independent (or non-authorized) distributors have stepped up their quality control practices and some marketplaces deal with only authorized sources.

Distribution did not have a great 2015 and whenever there’s a slump in the industry OEMs and EMS providers rightfully reassess their businesses. Distributors are often in the position of justifying the costs the incur for buying, storing and shipping inventory. With the ideal supply chain running on a lean, JIT or BTO model there’s less upside inventory in the channel than ever before.

It remains to be seen if the latest round of quakes in Japan spurs a round of inventory consignment, so-called “panic buying” or other behaviors associated with potential component shortages. The one thing that is for certain is there are a lot of companies in the electronics industry paying a lot of attention to “stuff” right now.