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Supply chain: too lean, too mean, too late now

March 18, 2011 // Peter Clarke

Supply chain: too lean, too mean, too late now

Analysts are trying to think through the implications for global manufacturing of the lost and damaged production of materials, equipment and ICs in Japan as a result of the devastating earthquake of one week ago. Despite some differences of opinion it is becoming increasingly clear that the world will now be asked to pay a price for the past globalization of the electronics industry.

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Of course, people will not be paying so high a price as the thousands of people who lost their lives one week ago or the ongoing and mounting price that hundreds of thousands of displaced people are paying in Japan right now. Our thoughts are with them.

But the issues identified around the supply of raw silicon wafers, of chemically engineered resin for packaging, of microcontroller ICs and other issues, highlight that the pursuit of the leanest and meanest just-in-time supply chain over the last decade has now put the global economy at some risk.

It is still not possible to know how this will exactly play out. Some have said that the loss of Japanese production in 2011 will be made up for by the additional stimulus to the economy of rebuilding efforts after the quake. Market research firm IHS iSuppli had warned about an inventory build-up in the supply chain that was happening prior to the earthquake. They now state that the inventory buffer could mitigate the worst effects of lost Japanese production. But it is still likely that on one account or another, a lack of adequate second sourcing and disposable manufacturing capacity is going to affect global GDP in 2011.

There was a time when electronics was seen as strategic in a military sense and domestic suppliers and second sources were seen as mandatory. That has now been largely forgotten. The pursuit of the highest possible volume at the lowest price created vertical disintegration, caused companies to leave markets unless they could be a market leader, and to drop activities where they did not have economies of scale.

The result is that the semiconductor industry has become a constellation of specialists that are all highly dependent upon each other. But when one is stricken there is no-one able to take the strain. The adage "for want of a nail" is called to mind and we must consider that some automobile may not be made in Germany, for lack of a chemical or a gas or a film or an IC that was in the process of being made in the north of Japan last Friday.

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