SIEMENS

There is very little difference between a global production network and a small furniture manufacturing operation. In both cases, a workpiece or component is sent from one station to the next, where it’s processed further and connected with other parts. The end result is a finished product. But unlike a sofa, chair, or table, a state-of-the-art high-tech product equipped with complex electronic systems requires a large number of materials and process steps. Raw materials from all over the world — whether they’re metals, semiconductors or specialized plastics — need to be processed into many different sub-components, such as microchips, boards, and displays, and then combined in a final assembly process before being shipped to far-flung customers. This type of complex product is always a global product, because it can’t be created without the use of resources from around the world.

It’s virtually impossible to grasp the scope of the global logistics chain for a high-tech product. That’s why a network of cargo ships, airplanes, trains, and trucks must be intelligently managed with computers in order to keep transport times and warehousing periods to a minimum. A high level of flexibility is required if a company is to be able to react quickly to changed conditions.

A study recently conducted by the PricewaterhouseCoopers auditing and consulting firm has concluded that the biggest challenges for the supply chains of the future will involve climate change and rising energy costs due to higher oil prices. Most of the experts cited in the study agree that higher transport costs will result in a return to a greater number of regional production networks with nearby suppliers between now and 2030.

According to the study, this does not mean that companies with worldwide supply chains will bring production home in a wave of anti-globalization. Instead, autonomous networks will form, especially in the emerging markets of Asia. These networks will supply local markets with products that are shipped at lower cost and can be quickly adapted locally in line with changing customer requirements.

The study also predicts that greater awareness of sustainability issues among consumers will lead to a noticeable change in consumer behavior. For example, by 2030 consumers in the West in particular will more frequently choose domestically-manufactured products over imports than is the case today.

A majority of the experts questioned for the study also expect to see a major breakthrough in terms of intelligent traffic guidance and autonomous freight transport systems sometime before 2030, with these systems making logistics more efficient, flexible, and environmentally friendly.

Dealing with disturbances and interruptions in the transport process has always been a key logistics issue. Like a blocked artery, sudden bottlenecks can occur in global supply chains, and although they may start out as minor problems, they can very quickly lead to a major system failure that shuts down the entire network.

Martin Bellhäuser works at Siemens Supply Chain Management, where he’s responsible for coordinating the decision-makers in the company’s global supply chain in the event of a crisis. “Ensuring the continued flow of information inside and outside the company is the most important thing in a crisis,” Bellhäuser says. “We need to gather all the available information as quickly as possible and make sure it gets to the right people throughout the company.” It’s only after crucial information has been properly disseminated that strategies can be implemented to correct problems — much in the way a bypass operation enables obstructions in the bloodstream to be circumvented until the blockages are cleared.

“You can prepare for many types of events and risks, but in most cases you can only react to them — as is the case with natural disasters,” Bellhäuser explains. “The important thing is to be fast, flexible, and creative and, above all, to learn from every crisis.”

Back in April 2010, an ash cloud created by the eruption of the Eyjafjallajökull volcano in Iceland shut down a large portion of European air traffic for several days. The Siemens crisis management team responded by chartering airplanes at Russian airports that were still open, and thus avoiding the airports that had been closed. “In most cases only small planes were available, and these were very expensive in relation to the amount of cargo that could be flown in them,” says Bellhäuser. “Siemens therefore organized an international cargo-space exchange that allowed the expensive charter planes to be used not only to ship urgently needed spare parts but also to get important deliveries to customers as efficiently as possible.”

Shortly after the ash cloud formed, Bellhäuser and his team set up a global, internal, and multi-level crisis communication network capable of providing information as quickly as possible to local managers and incorporating them into the network in cases of emergency. This measure proved to be extremely helpful a little less than a year later.

Dealing with Disasters. On March 11, 2011, an earthquake and a subsequent tsunami destroyed the northeastern coast of Japan’s main island, Honshu. At least 15,840 people died as a result. The catastrophic events led to several accidents at nuclear power plants in the region, most notably in Fukushima Daiichi, where a meltdown occurred and radioactive substances were released that contaminated air, water, soil, and food in the surrounding area.

Siemens employs about 2,300 people in Japan. Most of them in Tokyo, Sendai, and Morioka. Fortunately, not a single employee was killed or injured by the earthquake or the tsunami. Siemens’ Healthcare Sector is very active in Japan, and many Siemens production lines require customer-specific components manufactured in Japan, especially electronics and electromechanical parts.

“Of course, the most important thing initially was to make sure our people were safe,” Bellhäuser recalls. “We used our communication network to collect as much information as possible and piece together a complete overview of the situation on the ground.” It quickly became clear that the service technicians from Siemens Healthcare needed to stay mobile in order to ensure that optimal medical care could be provided by Japanese hospitals. “To ensure that technicians would be able to do their work despite the scarcity of fuel, Siemens sent out workers to take all available service vehicles to gas stations, which in some cases had waiting lines that were several kilometers long,” says Bellhäuser. This ensured that a fueled vehicle would always be available.

Siemens also launched a company-wide donation drive to help earthquake and tsunami victims; the company collected a total of €6 million. In addition, Siemens donated equipment such as mobile ultrasound units and reagents for laboratory analyses in order to support local medical care.

Once the company knew its staff in Japan was safe, specialists began to examine the disaster’s impact on the logistics chain. “The picture was pretty clear — we had no production facilities of our own in the affected region and also very few suppliers, although some of these were responsible for delivering urgently needed key technologies,” Bellhäuser explains.

The systems in question included components for process control technologies and film capacitors, which are essential for many different types of circuit boards. “We coordinated closely with the suppliers in question, who regularly provided us with status reports on repair work,” says Bellhäuser. “This enabled us to quickly access extensive information about the estimated production downtimes for each component. We were then able to react accordingly.”

Siemens also transferred some of its component orders to alternative companies in order to reduce pressure on its suppliers in the affected region. This in turn allowed Japanese suppliers to focus on urgent repair work.

In cases where alternative manufacturing plants couldn’t make up for component shortages, Siemens began to purchase parts on the open market. “For instance,” Bellhäuser recalls, “we experienced a bottleneck with regard to LED displays. Our procurement people reacted quickly by buying the necessary components on the open market. In the end, excellent communication and the exemplary support we received from our suppliers enabled us to get through the terrible catastrophe in Japan with virtually no damage to speak of. There were no major production shutdowns whatsoever.”

Transparent internal communication is an indispensable part of logistics crisis management. For example, many Siemens employees outside Japan were worried about using components from the country after the accidents at the nuclear power plants were reported. “We met with experts and carefully analyzed the risk of contamination from Japanese components,” Bellhäuser says. “It was determined that the understandable fears of our people were unfounded in all cases, and it turned out that many components had already been loaded onto cargo ships that sailed weeks before the disaster. This allowed us to quickly allay the fears and concerns of our employees outside Japan.”

Lessons for the Future. What lessons did Siemens Supply Chain Management learn from the events in Japan? “The most important thing we realized is that you risk having major problems if you use only one supplier for a certain component,” says Bellhäuser. “That’s why we’re making a greater effort to reach agreements with other suppliers in regions prone to earthquakes and other disasters so that we can fall back on them in emergencies.”

“The floods in Thailand in the fall of 2011 also showed us how dangerous it is when a component that is needed at manufacturing facilities around the world is mainly procured from only one region,” Bellhäuser adds.

Thailand produces more than one third of the world’s computer hard drives, for example, and production is concentrated in the region around Bangkok, which was hit by the floods. The disastrous floods in the region shut down virtually all production in a very short time. The delivery estimates of many major suppliers such as Seagate, Hitachi, Toshiba, and Western Digital plummeted. The latter two firms cut their delivery forecasts by around 50 percent. This resulted in an unprecedented rise in the prices of hard drives and a huge decline in earnings at the manufacturers. Western Digital, the world’s leading manufacturer of hard drives, reports that it won’t return to pre-disaster production levels until September 2012.

The floods in Thailand have made it obvious to everyone that even though clustering — i.e. the concentration of similar industries in the same region — can reduce transport costs and generate positive synergy effects, it can also cause huge economic disruptions. Suppliers around the globe will probably have to rethink their clustering strategies in certain regions in the future if they want to achieve more effective crisis management — especially in times of climate change.