From 2000 to 2001, the high-tech industry, having spent hundreds of millions of dollars on sophisticated supply chain management software, got blindsided by an acute shortage of certain electronic components.
One such device, the tantalum capacitor, was in such short supply and high demand for use in both computers and cell phones that one high-tech manufacturer was forced to cut its earnings estimate for the quarter. A leading PC maker, "gaming" the market the way the Hunt brothers cornered the silver market in the 1980s, saw fit to place orders for 10 times the amount they could use of these 15-cent to 25-cent devices. Yet another high-tech manufacturer bought up cell phone handsets to remove the capacitors for use in a new product.
"The huge spike in demand for cell phones caused unprecedented demand for these components," says Bud Mathaisel, senior vice president and CIO at Solectron, a contract manufacturer for various electronics original equipment manufacturers (OEMs). Solectron found a creative solution to the shortage, with engineering teams working with suppliers to redesign the component. "We began to shift suppliers to ceramic capacitors that cost $1.25 each," Mathaisel says.
After the 1995 earthquake in Kobe, Japan, the Osaka plant of Sumitomo Metal Industries Ltd. lost all water and gas. The plant was the sole source of brake shoes for Toyota's domestic cars. Toyota's vulnerability to a supply cutoff -- operating with only minimal inventories of parts -- caused the company to halt production at most of its plants in Japan. Toyota lost production of 20,000 cars, costing it an estimated $200 million in revenue.
Phillips N.V., the Dutch electronics giant, suffered a fire at a chip plant in Albuquerque, N.M., in 2000. The company lost about $40 million in sales as a result. In a ripple effect, a major customer of the plant, cell phone manufacturer Ericsson, came up short of millions of chips it needed for its latest generation of cell phones. The impact was devastating for Ericsson, which took a $2.34 billion loss in its mobile phone division, citing not only component shortages, but a poor product mix and marketing troubles as well.
These are just a few examples of the mayhem a supply chain disruption can wreak on a manufacturing company's operations and financial health. Whether it's a natural disaster, a strike or a labor slowdown at a major port, the potential risks facing global manufacturers today are further magnified by the progressive leaning out of inventories that has taken place in recent years.
"The supply chain is getting leaner, with less buffer and more inventory being held in other countries," observes Steve Phillips, CIO, Avnet Inc., a distributor of electronic components and computers. "This means there is less ability for the supply chain to soak up the shocks that occur."
In fact, the inventory-to-sales ratio for the U.S. economy has been consistently declining, evidence of a much leaner supply chain. "There is a greater potential for the effect of disruptions in the supply chain to be amplified as a result," says Mark Hillman, senior research analyst at AMR Research in Boston.
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