I completed a webinar last week on the “Seven Key Trends that Will Impact Procurement in 2012” (an audio recording is here (no registration) for now and the slides may be requested). One trend is supply risk which we’ll discuss below:

Q1: What do the following companies have in common?

Apple, Broadcom, Benchmark Electronics, Cisco, Canon, Dell, Digi International, Emcore, Emulex, Emerson, Fabrinet, Ford, Hewlett-Packard, Hitachi, Honda, II-VI Inc., Intel, JDS Uniphase, Lenovo Group, LSI Corp, Marvell Technology Group, Molex, NEC Corp., NetApp, Nikon, On Semiconductor, Panasonic, Rectifier Corp., Renaissance RE, Sanmina-SCI, Seagate, Semtech, Super Micro Computer, TiVo, Toyota, Western Digital and dozens more.

A: Their Q4 2011 earnings were impacted by Tropical Storm Nock-ten.

Q2: Wait, impacted by what?

A. The landfall of Tropical Storm Nock-ten in Thailand triggered the huge floods that ultimately killed 815 and impacted 13.6 million more people in what the World Bank estimates was the world’s fourth costliest disaster ever ($45 Billion and counting in damages) [Sidebar: The world’s most costly disaster also happened in 2011 – the Japanese tsunami/earthquake/nuclear calamity].

Q3. Who else was impacted?

A. Every Thai-based company, every company with sizable customer-base or supplier-base in Thailand. Since approximately 25% of the world’s supply of disk drives is manufactured in Thailand, every company that planned to buy disk-drives or machines that use disk drives in the first half of 2012.

When we first covered the Thai floods in this article “SNAFU” in October, damage was only estimated to be $5 Billion; although we predicted it would be much worse and “that many companies are unknowingly exposed to supply chain risk in Thailand and we predict a rash of supply chain disruptions will be caused by the Thai flooding.”

Let’s look at the flood’s impact on a few companies

• Jan 23 – Western Digital stated that during the last quarter, the company incurred charges and expenses of $199 million related to the Thai flooding
• Jan 31 – Honda said that its net earnings in the October-December quarter tumbled 41 percent when Thailand’s worst floods in 50 years swamped its vehicle assembly plant in Ayutthaya, north of Bangkok. The flooding also disrupted the output at many Honda suppliers in Thailand, forcing it to reduce production as far away as the U.S. and Canada. Honda said production in neighboring Asian countries interrupted by the problems in Thailand was expected to return to normal by April, 2012.
• Feb 2 – Hitachi’s PC and display business have been adversely impacted by the disk shortages following the continued flooding in Thailand, where about a quarter of the world’s disk drives are manufactured.
• Feb. 3 – Panasonic Corp. almost doubled its annual loss forecast to a record 780 billion yen ($10 billion), the latest Japanese electronics company to predict weaker earnings because of Thailand floods and slowing demand for TVs (Note: part but not all of the loss was due to the flooding)
• Feb 3 – Nikon had to swallow a one-off loss of ¥10.9 billion last quarter (approximately $143.1 million), due to widespread flooding that devastated its Thailand manufacturing plant, in October.
• Feb 7 – Emerson reported a 23% decline in fiscal first-quarter earnings, as flooding in Thailand disrupted the supply chain and affected results in the Process Management and Network Power segments. The Thailand flooding caused a $300 million delay in sales in the quarter.

This is just a small sampling of companies officially reporting the impact from the flooding on earnings.

Let’s look at some of the main factors that caused the flooding:

• By March, 2011, Thailand had experienced 344% more rain than in an average year
• Heavy rains throughout monsoon season
• Severe Tropical Storm hitting in Vietnam and Thailand
• The weather phenomenon, La Niña
• Low rainfall in 2010, which caused reserves to be unusually high
• Unusually high late season rainfall
• Flood barriers failed
• Floodgates and dams may have been mismanaged

The result from these factors was a country underwater, with sixty-five of the seventy-seven total provinces in Thailand declared a flood disaster zone. We list these key factors because, by our estimation, none of the companies impacted by the floods had any control over any of the factors. That is obvious. The question is how many procurement teams understood that in Thailand, April March Showers bring October Floods? There were, after all, early indications of unusual weather and heavy rain and that some flooding was possible.

Globalization surely has its advantages, but the global expansion of a supply chain exposes it to generally more supply risk and certainly different types of supply risk. But supply risk isn’t just for Chief Procurement Officers anymore. As we’ve seen above, supply risk can have a significant impact on an entire company and industry.

When companies have been bitten by the supply risk bug, they take notice and seek future protection. Interestingly, we received inquiries from three different companies impacted by these floods regarding ideas, technologies, and best practices regarding supply risk management.

But part of the challenge is to avoid, anticipate and generally mitigate the risk before an incident occurs. As such, supply risk is should be accounted for in most sourcing decisions (As discussed in our recent series, it is an important non-price attribute).

Tagged in: Globalization, Sourcing, Supplier Performance Management, Suppliers, Supply Risk