Sunday, 6 November 2011

Will Thailand's floods redesign supply chains?

Natural calamities, it seems, are at last forcing global corporations to reassess their stretched supply chains geared to just-in-time (JIT) production but will that reaction die on the vine? In my last report (Supply chain shift and counterfeiting threaten Asia) I mentioned the minor, human forces driving a rethink on JIT global supply chains, including rising costs in the Far East, unreliable deliveries, unpredictable quality and fears over counterfeiting. I also mentioned the more serious risks posed by natural calamities in countries where the concentration of production resources exposed the folly of putting too many JIT supply eggs in one basket.

On April 25, in my report, "Japan's earthquake must force JIT supply changes," I warned of the need to diversify supply sources away from natural, calamity-prone countries where there were choke points for many products like cars and consumer electronics, owing to the high concentration of production resources. Now, only seven months on from the Japanese earthquake and tsunami, the world must contend with another natural calamity, with far-reaching repercussions for global supply chains -- the disastrous floods in Thailand.

The effects of the Japanese earthquake and tsunami on March 11 on the global supply chain are still being felt and production losses around the world will run into many billions of pounds, hitting the auto and consumer electronics industries particularly hard. Thailand's worst flooding in 50 years will have similar seismic effects on the global supply chains supplying the same industries, again because global corporations ignored a cardinal rule of JIT philosophy -- always have a fall back, effective disaster recovery plan.

It must be said, however, that Thailand, south-east Asia's second biggest economy, bears part of the blame that now sees global businesses with eggs on their faces. The country has allowed unrestrained industrialisation and real estate developments that has bequeathed an inadequate drainage infrastructure, not helped by political in-fighting, indecision and rampant corruption. For that folly Thailand will now pay a high price, which could destabilise the country. The deluge has destroyed one quarter of the nation's rice crop and put 700,000 people out of work. Many small businesses and people have lost their uninsured properties. The country's finance minister estimates the economic damage to his country at 1.7% of gross domestic product. That would equate to a loss of £25 billion in Britain.

Such lack of good governance, however, is common elsewhere in Asia where there are supply chain choke points, a case in point being south-east China where, as I predicted on April 25, much of the country was deluged by the worst floods in over 50 years, causing billions of pounds worth of damage. On that occasion the world was saved from serious supply chain disruptions, but it was a close run event.

It would be wrong, however, to be too judgmental of these countries, for the task of defending their industries against nature's fury is herculean. But will these economies now suffer more in the longer term as global businesses come under pressure to rethink the way they produce and distribute?

A rethink is certainly essential but that does not mean countries like Thailand should be abandoned as a cheap source of supplies. Rather, the answer lies in such calamity-prone countries taking measures to afford better protection and warning from flooding, and some diversification of supply sources so that unpredictable shortages in one country can be at least partly offset by supplies from more climatically stable countries. This would prevent plunging developing countries back into penury, a process that would only slow global economic growth and exacerbate political tensions.

Despite the signs that at long last such natural calamities are forcing global corporations to think of redesigning their supply chains, some commentators believe that the lure of cheap production costs in a highly competitive world will overcome such natural shocks and leave JIT supply chains unaltered. Corporations must answer to their shareholders and markets do not reward prudence. Such disregard for the protection of employees is dangerous but that is not a sin confined to corporations. Governments, local and national, are just as culpable over natural calamity warnings.

Nature's warnings are often neglected, with catastrophic consequences. This purblind reaction seems to be unfolding on the small island of El Hierro in the Canaries. Earthquakes cannot be predicted, yet, but volcanic eruptions, often associated with earthquakes, usually give ample warnings. As sure as I can be, I greatly fear that the sea bed volcanic eruptions close to El Hierro will explode violently, accompanied by earthquakes, within a few weeks, causing significant loss of life and property damage. Fortunately, an ash cloud is unlikely to blanket the other islands.
El Hierro's residents should leave now.