Question

The course is Managing Technology

Consider the following scenario: In the 1990s, hard disk drive (HDD) makers were among the first industries to move production to lower-cost countries. Beginning in Singapore, these companies shifted manufacturing operations to China and Thailand, in search of ever-lower labor costs. Since then, Thailand has become the second-largest maker of hard drives and a major supplier of parts to the industry worldwide. With the catastrophic Thai floods in the fall of 2011, the industry faced shortages of over 30 million drives per quarter. Some executives at HDD companies were forced to explain a glaring oversight: Why had they had relied so heavily on a supplier in a country located in a high-flood risk area?

Also consider that: By the end of the 1990s, most supply chains had become lean by minimizing their inventories and reducing waste and could schedule deliveries across the globe with incredible precision. Supply chain speed and flexibility were impressive. Products that should take months to procure and manufacture were promised within days of customer requests.

1. What SCM lessons can be learned from the experiences of HDD makers?
2. What are the risks of highly efficient and lean supply chains?
3. Could one catastrophic supply chain event wipe out years of profits or market share? Explain your answer.
4. In your opinion, when do cost savings outweigh the risks?
5. In your opinion, when are cost savings outweighed by the risks?

Answer 1

What SCM lessons can be learned from the experiences of HDD makers?

Floods on one side of the earth affect the economy on the other side of the earth through global supply chain networks. Today’s global supply chain has achieved cost reduction by reducing inventory, shortening transportation timelines, and streamlining production systems. However, with lean and complex supply chains, there is much more susceptibility to systemic risk, a financial term used to describe a risk originating from one node of a financial network which then harms the entire financial market. This notion of risk is applicable to supply chains. While a more efficient production and transportation system is more capital intensive and cost efficient, in the event of a natural disaster, the entire system may suffer disruption and break down. The Economist reported that while death rates from natural disasters have been falling, their economic cost continues to increase drastically. This cost includes place based impacts and supply chain impacts. However, the latter have not been systematically reported or broken out.

The most important lesion that can be learned from the floods to ensure component manufacturing must have been spread across different plants rather than consolidated in a single location. It’s a lesson well learned.

Learning that concentration of technology manufacturing in a single region, south-east Asia, has created a brittle supply chain and left the industry vulnerable to man-made and natural disasters.

It has very clearly demonstrated that economic theory and practice isn’t working and needs to be reformed. Making judgment calls using simplistic models of supply, demand, price and profit is far too crude a starting point. Inclusion of resilience, survivability, sustainability, people and ecological impact in the equation will have a balancing role.

What are the risks of highly efficient and lean supply chains?

The impact of floods in Thailand reflects the risk of highly efficient and lean supply chain. The review suggests that HDD supply chains had somewhat different mechanisms of risk transmission and response that translated into different times to recovery, loss and market performance at the individual company level. The need for flood prone countries to consider local risk proofing as part of industrial development was emphasized, both by the nature of the resulting losses to the country and to the global supply chain, and due to the realignment of potential future investment and supplier networks. Regional flood proofing could benefit from systemic risk analysis and its use in infrastructure design, land use zoning, water infrastructure operation, transportation systems functioning, and climate and flood forecasts. Resilience in the supply chains of those who had higher inventories and alternate suppliers was demonstrated consistent with the expectation of supply chain performance under disruption. This brings up the question of how best supply chains could be optimized considering market, production, inventory and disruption due to natural hazards. Surveys show that most of the affected companies want to operate in the same locations and indeed, they answered that Thailand is still an attractive place for their investment. Companies have to maintain competitiveness while increasing resiliency. Costs might increase when manufactures ask their suppliers to diversify risk and procurement sources. Thus, it is important to identify how they can build resiliency in a more efficient way without losing their economic competitiveness, which is a critical consideration in future research. By examining the case study of Thailand and other cases related to extreme events and their concurrent risks, this study suggests four research questions and one hypothesis using the concept of Network Analysis.

Could one catastrophic supply chain event wipe out years of profits or market share? Explain your answer?

From our example we find that HDD shipments from the industry’s five major manufacturers declined severely in the fourth quarter of 2011 to 30%. The effect of the lost electronic parts production rippled across the global economy. The lack of hard disk drives increased the price of desktop HDD by 80–190% and mobile HDD by 80–150%. This clearly shows that the world economy is closely interconnected through a global supply chain network and the indirect damage of disasters now easily affects the consumer market at the global scale in the electronics sector. In terms of the impact on the market price, even six months after all the inundated industrial parks completed water drainage after the flooding, most of the prices of both hard disk drives (HDD) remain higher than the prices before the floods

In your opinion, when do cost savings outweigh the risks?

To quote above example, this question reflects the observation that the loss is greater if a factory that produces a unique component or plays a critical role in a supply chain is directly impacted by a disaster. This is obvious from the case of HDD manufacturers in Thailand. When examining the time needed to recover, the electronics sector took longer to recover to “pre-flood” levels of production than the automobile industry for the simple reason that the electronics sector’s facilities were more directly damaged by floods.

In your opinion, when are cost savings outweighed by the risks?

If a supply chain is comprised of strong ties to one company exclusively, then immediate damages from a disaster will likely be greater. Yet, even if business partners in the same supply chain network are not directly impacted by disaster, the impacted node may receive help from them and may therefore be able to recover more quickly, with the result that damages may be mitigated. Here, the strong ties are defined as repeated, affective, relational exchanges. Strong ties would promote trust, create social norms, and facilitate cooperation as a consequence. Though this hypothesizes that strong ties would reduce risks to disasters claim that strong ties may induce idiosyncratic features and become less valuable for firm performance in the future. Thus, it is important to examine the same in the context of resiliency, robustness, and competitiveness of supply networks.

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