The Need for Contemporary Risk Assessment:
The April 2011 earthquake (magnitude 9.03) off the Pacific coast of Tōhoku, Japan, that triggered massive tsunami waves of 40.5 meters (133 feet) in Myako, Iwate Prefecture, and travelled six miles inland in the Sendai region, was the first event in a series of events that challenged the traditional theories surrounding the contemporary assessment of risk. The Tohoku quake was followed in July 2011 by the landfall of tropical storm Nock-ten in Thailand, that flooded many provinces along the Mekong and Chao Phraya river basins. By October 2011, the Thai flooding had reached the capital city of Bangkok, inundating the area under as much as five meters of water in some areas and persisted until January of 2012. In addition to these specific disasters, additional threats to the component supply chain were also realized in the forms of increased tornado and hurricane activity around the world, as well as continual threats from the ghastly specter of war, especially in central Africa and the Middle East. The result of these events was that various levels of the component supply chain were affected. One key aspect of risk mitigation, clear visibility on the supply chain, was limited to the production of components and disregarded raw material usage and supply.
What was Learned from the Recent Series of Events:
These recent events, which occurred very close together, created the need for a more modern form of risk assessment, that increased customer visibility to the ground and redefined sole sourcing.
Lack of Customer Visibility to the Ground:
In addition to bringing risk management back to the forefront of discussion points in the component supply chain, the recent series of natural disasters and man-made crisis’ also highlighted the compounding affect that multiple events can have on a healthy supply chain when they happen so quickly and so near to each other in both time and frequency. Early reports after the Tohoku event for example, noted that component manufacturing facilities had been damaged, but were still operational in most instances because of the fact that many factories had been built to withstand the affects of earthquakes.
However, for the primary component customers at the OEM and EMS level, their visibility did not go beyond the component level. What was not apparent right away was the damage to the factories supplying raw materials to the component vendors, who unfortunately for some key materials vendors serving the capacitor industry were centralized in the affected areas. Damage to the ceramic capacitor raw material supply chain, the aluminum electrolytic capacitor raw material supply chain and the tantalum capacitor raw material supply chain in Japan, for example, was a lot worse than damage to the component factories themselves, but OEM and EMS customers were slow to realize this because they lacked visibility beyond the component level, and into the supply chain for the materials that are used to produce the components.
If My Component Vendor is Sole Sourcing Raw Materials: So Am I
This lack of visibility further down the supply chain opened up a veritable “can of worms” for the OEM and EMS customers because they had in effect violated another primary rule that guarantees risk mitigation, sole sourcing. While the OEM and EMS companies had gone to great lengths to create redundancy in component supply by having between two and four vendors supplying their plants, what they did not understand through lack of visibility was that all of these vendors were sourcing the same raw material factories who were NOT reliant on redundant systems. So even though risk mitigation appeared viable on the surface, a little digging revealed a more narrow and limited supply chain, without the comfort of redundancy.
Advanced Technology Offers a Competitive Advantage but at Heightened Risk
Moreover, the raw materials factories that were impacted by the Tohoku quake in Japan in April 2011 were not only supplying raw materials to the same component vendors, but were also supplying advanced cutting edge materials that offered their OEM and EMS customers a competitive advantage in either volumetric efficiency or performance. One primary example of this would be the damage incurred in the unique supply chain for high capacitance MLCC in the Tohoku quake. The factories impacted were producing the ultra-high purity barium titanate and titanium dioxide needed to produce nano-sized ceramic dielectric materials. These nano-particles are required to achieve extremely high capacitance in very small component footprints. Another example was the damage incurred by a producer of specialty electrolytes for aluminum electrolytic capacitors, as well as damage to a specific factory producing high voltage electrolytic foils. The subsequent flooding in Thailand so soon after the Tohoku quake also shed light on a new challenge. Even though certain components may seem as if they are not sole sourced, the truth of the matter only becomes apparent when the need arises. For example, a certain supercapacitor product line being sourced out of Thailand, one which was damaged by the floods following tropical storm Nock-ten, had an equivalent series resistance (ESR) that was unique in the industry. The customer believed that the product line was easily replaceable with parts from other vendors, only to realize that they were buying the product for exactly what made it different from the competition − the low ESR. Once again, the depth of visibility on the true nature of the component supply chain was limited, and subsequently what was thought to be risk mitigated, was in fact quite serious.
Where do the Feedstocks Come From?
These natural disasters created a need for OEM and EMS customers to look even further down the supply chain at the location where materials enter the market as feedstocks- at the mining operations. What was discovered was that man-made crisis’ were also creating risks. Tantalum was immediately scrutinized because it has been identified as a “conflict mineral” by the United Nations with emphasis on its extraction from Central Africa (DRC, Rwanda, Uganda). Also of great concern was neodymium, which is used as an additive in NPO type ceramic chip capacitors. Today 98 percent of the world’s neodymium is mined in China, and exports of the material have been curtailed, causing a quadrupling in price and increased competition among industries to obtain the rare earth material. Also of concern was palladium mining in South Africa, where strikes among miners in 2012 made international headlines.
Figure 1.1: Selected Areas Requiring Risk Management And Contingency Plans
Source: Paumanok Publications, Inc.
The New Nature of Risk
Figure 1.1 above describes the specific threats to a supply chain that create increased risk factors. These include:
The tendency for natural disasters to occur where components are manufactured, where materials are engineered and where materials are mined should be taken into consideration when analyzing risk to the supply chain. Earthquakes and floods have proven to be realistic and particularly savage in their destruction since 2011, not only damaging factories, but also creating logistical problems for factories not affected by the initial event (i.e. blocked roads, loss of power). Most major manufacturers who are traded publically describe in their annual reports about their specific risk factors as they relate to natural disasters, and will readily identify if their plants are located in zones prone to earthquakes or floods. What is not usually discussed however, is how the company mitigates the risk of having their plants in zones that are historically prone to natural disasters, if they do at all.
Not all disasters can or should be considered as “acts of God.” Man-made crises are potentially just as disruptive. Mining operations for feedstocks have proven in the past few years to be areas where risks need to be assessed and mitigated. Key raw materials are sourced in the African continent and in the Middle East where they can be subject to the effects of human conflict. Additional man-made crisis’ include the potential for workers to strike given their pay scale and /or adverse working conditions.
Sourcing components from one vendor poses an obvious threat to the OEM and EMS customer. However, if multiple component vendors source their raw materials from a single factory or a single mine, the risk is not necessarily mitigated, just moved beyond visibility.
Many OEMs and EMS customers attempt to gain a competitive advantage by employing emerging and cutting edge technologies. In many instances however, that technology is based on a raw material innovation and that innovation is controlled by one material vendor. Therefore, in an attempt to obtain a competitive advantage, a raw material vendor or a component manufacturer may inadvertently create a sole source situation. This situation only becomes a true risk of that component manufacturer or raw material supplier is located in an area that is historically prone to natural or man-made disasters.
Methods for Advanced Risk Mitigation in Supply Chain Management:
Visibility is the Simplest and Most Effective Method of Risk Mitigation:
Component visibility on the supply chain is the best approach to proactively mitigating risk. Understanding who supplies the components to a customer is no longer enough. Visibility on the engineered material vendors that supply the component manufacturers and the mines that supply the engineered materials vendors are ideal in having a full appreciation of exposure (See Figure 1.2).
Source: Paumanok Publications, Inc.
Limiting Sole Source Situations:
Identifying situations where multiple component vendors have sole sourced a single raw material vendor are recommended, and fully understanding how that one material vendor establishes redundancy of supply is also key. Redundancy of supply, especially for advanced or emerging technologies may be difficult to emulate through manufacturing, but risk still can be mitigated by establishing stockpiles at two or more warehouse locations and at the component vendor.
Establishing the Proximity of Like Vendors:
The proximity of key raw material vendors and component manufacturers to each other is another red flag in risk mitigation. The supply chain tends to encourage this because it is more cost effective to have raw materials vendors in specific geographical locations near the component factories. Sometimes raw material vendors will congregate where power costs are low, or because they are nearer to a specific mining operation. However, putting all eggs in one basket increases risk substantially. For example, in the Tohoku event, key raw materials suppliers to the same industry (electrolytes and foils supplying the aluminum electrolytic capacitor industry, and barium carbonate and titanium dioxide supplying the MLCC industry) were in the same proximity. This lead many OEM and EMS companies after the fact to question to wisdom of placing so many valuable assets so close together. However, the push for just in time delivery and the need to generate sufficient margins in such a highly competitive supply chain left very little room for anything other than close proximity to save on freight charges. This theory is applicable in advanced manufacturing, as long as the local geography is not prone to earthquakes, floods, typhoons and other acts of God.
Knowing the Depth of Your Exposure:
The supply chain for electronic components begins in the ground. Various feedstocks are mixed together to create the capacitance, resistance and inductance required to run electronic systems. Many of these are base metals, such as bauxite (aluminum), nickel, copper, barium, titanium, tantalum, tin, tugsten (Wolfram), etc., and many are precious metals − palladium, platinum, silver, gold, ruthenium and rhodium for example; and many are based on plastics, such as polypropylene and polyester for example, which are derived from crude oil. Many feedstock materials are mined in politically unstable regions of the world and are used as currency to purchase weapons for waging war (conflict minerals). Visibility on where the engineered material vendors get their feedstocks is also an important way of mitigating risk in a supply chain. Some OEM and EMS companies, for example, have been named unfavorably in United Nations reports as ultimately financing conflict in direct violation of their own code of ethical conduct. Their reply was an honest, “we had no idea, we lacked the visibility.” (See Figure 1.3)
Figure 1.3 Are You Engaged in Modern Risk Assessment?