Monday, November 7, 2011

The diversification of global supply chains

Today's New York Times on the impact of Thailand's floodings on hard drive suppliers:
Until the floodwaters came, a single facility in Bang Pa-In owned by Western Digital produced one-quarter of the world’s supply of “sliders,” an integral part of hard-disk drives. 
Last March, in Japan:
Shin-Etsu’s Shirakawa plant is responsible for 20 percent of global silicon semiconductor wafer supply. The plant is located in Nishigo Village, Fukushima Prefecture Shin-Etsu reported that there has been damage to the plant’s production facilities and equipment. 
It was surprising to me that for specific components, concentration seems to be the norm. In particular, Japan was a big object of analysis after last March earthquake


However, the trend seems to be general. Shin et al. discuss the trend towards a single-supplier chain and evoke explanations all, from what I see, related to economies of scale(reputation building, communication, coordination, efficiency in the use of transportation/containers). Kekre et al. stress the benefit in terms of quality control and argue that GM and Ford's adoption of single sourcing led to quality improvement, and show that firms with high quality restrict the number of suppliers.

An article in the Financial Times last April made a good summary of the fact that we are still in a transition phase.

First, the degree of diversification varies by sectors, depending notably on complexity:

It is in sectors such as carmaking, and the manufacture of construction equipment and electronics that the repercussions of last month’s disaster have been most marked. Suppliers in Japan(...)specialise in making parts hard for other businesses to create.
Though it is not clear that complexity is the main factor:
In electronics, about 80 per cent of basic component production, along with a great deal of final assembly, is based in China. The situation is similar for clothing and footwear. In such industries, there are few opportunities to mitigate the consequences of a disaster in south China of the type that gives Mr Cox nightmares. But in other sectors, particularly in engineering, where expertise in production is spread more widely and pricing pressures are less intense, many companies are instituting strategies to insulate themselves at least partially.

Interestingly, increasing labor costs make diversification easier with high-cost countries becoming attractive again, and this reduces the incentive to outsource production:
The trend towards localism in manufacturing is embodied in a gleaming new $6.8bn semiconductor manufacturing complex near Albany, New York state.
Finally, the diversification of the supply chain might be the final objective, but has still a long way to go:

Companies at the cutting edge of supply-chain planning have set up data systems to complement their multiple networks. These enable them to remain abreast of problems in various locations, using spare capacity from plants elsewhere to provide extra parts. Swiss-Swedish industrial group ABB has 5,500 suppliers linked via data networks and transport connections to assembly factories spread globally. Control of the flow of parts is devolved to 450 supply chain experts based in 40 countries, who ABB feels are best placed to match supply to fluctuations in local demand.

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