Purchasers need to develop supply chain strategies and software to reduce risk

James Carbone, contributing editor
James Carbone, contributing editor.

Even small OEMs and EMS providers need to take measures to guarantee continuity, By James Carbone.

The 2011 earthquake and tsunami in Japan and severe flooding in Thailand that occurred later that year are often cited as reasons OEMs and electronics manufacturing services (EMS) providers invested more time, effort and money into supply chain risk management strategies and tools.

Those disasters killed thousands of people, destroyed homes and businesses, and shut down production of many key components and materials needed by electronics companies. Buyers scrambled to find sources for crucial components. As a result of those disasters, many electronics manufacturers beefed up their risk management efforts or instituted risk management plans for the first time.

The disasters in 2011 “really triggered a whole lot of programs and new investment in risk management” in the electronics industry, said Debbie Wilson, research vice president, procurement solutions and strategies for Gartner Inc. Many companies said they wanted to make sure that the disruption of supply that occurred in 2011 never happened again, according to Wilson.

Large companies have developed their own software tools and risk mitigation strategies to manage supply risk and lessen the adverse impact of a disaster or other supply chain issue that disrupts continuity of supply of needed parts.

Wilson said most electronics companies develop their own software tools rather than purchase them because the risks that companies face can vary depending on the products that they make and the suppliers that they use.

“The risk assessment process is unique for every company,” she said. “It is also considered a competitive advantage to have the most resilient supply chain so a company that has a good method of collecting and using data to manage supply risk doesn’t want to share it,” Wilson said.
Features of home-grown risk management software vary based on the needs of the OEM or EMS provider that developed it. However, many electronics manufacturers have software that provides real-time information to buyers and others in the company about a natural disaster or other disruptions such as strikes or environmental disasters. The tool often provides information about the components, supplier factories and customers impacted by an event very quickly.

For many electronics manufacturers, risk management software gathers information from dozens of global reporting sites. It processes the information and sends it to buyers and company executives. The idea of course is by having the most up-to-date, accurate information about a risk event, buyers can make decisions to mitigate the impact of the event on supply of needed parts. For instance depending on the commodity, buyers may be able to switch sources or find alternate parts in the event that supply of the component from a supplier is shut down because of a disaster.

While most companies develop their own software tools to manage risk, there are some commercially available software packages for supply chain risk management.  “There are packages available but their solutions work so-so. They have not had a huge amount of momentum,” she said.

Mitigating risk
Wilson noted that risk management software developed internally or purchased is just a tool and companies need to first develop a methodology to identify risks and robust mitigation plans to implement if a risk turns into reality.

Of course, while natural disasters are dramatic examples of supply chain risk, there are others that can also have a significant impact on a company and need to be addressed. Some of them

Supplier financial viability
Because of downturns, market conditions or mismanagement some suppliers may go bankrupt. Buyers need to know what the financial risk of doing business with the supplier is and monitor the supplier’s stability.

Quality is often taken for granted in the electronics industry, but even good suppliers have lapses in manufacturing that result in defective parts or ones that don’t work up to the stated spec.

Substandard and counterfeit parts
Buyers purchasing on the open market run the risk of buying some bogus components.

Strikes and social unrest
Demonstrations against the government in a region can result in shutdown of airports or ports causing a delay in needed production materials.

Increased fuel costs or cargo capacity issues can impact continuity of supply.

Materials and labour costs
Increase in raw materials prices or labour costs in a region can result in higher prices for parts.

Corporate social responsibility
A supplier that forces workers to work long hours in unsafe conditions or disregards environmental regulations can have a negative impact on an OEM brand.

Component obsolescence
If a component manufacturer ceases to make a part and it is still  used by OEMs and EMS providers, it can result in a costly redesign, or force buyers to source the discontinued parts from suppliers that charge a higher price.

Wilson said to help identify risks, a company first needs to map its supply chain and determine which suppliers, components and other materials pose risks and what the specific risks are. Mapping out supply chain can be difficult.

“One of the problems is that in the electronics industry most companies outsource so there is a multitier supply chain,” said Wilson. A buyer may not necessarily know that his or her company has a “single source for a semiconductor package in Japan five levels down the supply chain”, she said.

Obviously the risk is if something happened to the single-source package supplier, it could disrupt production of a needed semiconductor.

While mapping all tiers of the supply chain is important to identify risks, so is determining how much of a company’s revenue may be dependent on a single supplier, said Wilson.

“For example, say you have that sole-source packaging supplier in Japan and they go under and you can’t replace them for a year, but only one tenth of one percent of your revenue is at risk,” she said. “Well you’re going to treat that really different than if 10 per cent of your revenue is at risk,” she said. If a high percentage of revenue is at stake, a company may opt to carry more inventory of the part, qualify other suppliers, or even redesign a subsystem so alternate parts with multiple suppliers can be used.

Other important features of supply risk management include identifying the people within the company who may be affected if production of a significant part is threatened and having incident management capability.

“You have a global emergency response team,” said Wilson. “You have all the names and phone numbers of people” that need to be notified in the event of a disaster or other event that could disrupt supply.

Go to your (war) room
Because risks can impact various departments of the company, some companies have multifunction steering
committees for risk management.

Some companies have a “war room” where members of a risk management team assemble to manage supply chain issues caused by a natural disaster or other disruptive event. Calls to those impacted by an event are made from the room from a list, which may include commodity managers who may purchase the parts, design engineers, who may be considering the part in a new product, quality and financial managers. High-level executives may also be notified depending on the severity of risk and potential revenue impact disruption of supply of a part could have.

An EMS provider would notify its OEM customers that are impacted.

Some companies also maintain a list of supplier contacts, even for those suppliers that the company does not deal directly with so “alternate suppliers can be identified,” said Wilson.

To help manage risk, some companies conduct “tabletop” rehearsals with key suppliers that simulate a disaster to make sure that the company is prepared to handle a real disaster that could shut down production of a needed component.
“It is a planned event, but people involved will know exactly when it’s going to occur,” said Dan Panzica  chief analyst, outsourced manufacturing intelligence service for IHS Markit Technology.

Before the event, companies’ leaders are given “control documents” that provide information about a certain scenario such as a fire at a printed circuit board factory or strike at a port. The idea is to evaluate how everyone responds and if everyone that should be notified is notified and if they respond according to whatever plan the company has in place to manage such an event.

“You look at the quality of the response, how quick it was. It is a fire drill,” said Panzica. “They are quite effective.”