HIGH-TECH / ELECTRONICS
Geographic Concentration In
High-Tech Supply Chains
It is common for high-tech
companies to have established
processes to ensure they are
not overly dependent on too
few suppliers. Far less common are processes or intelligence to ensure they are not
overly dependent on a specific
geographic region. But recent
events have pushed the issue
of risks from geographic concentration of the supply base
to the forefront.
—Bill McBeath, Chief Research Officer,
lmost all industries tend to become concentrated in specific
geographic regions, such as finance in New York or auto manufacturing in Detroit. High-tech is no exception, with concentrations in Silicon Valley, the southeast coast of Japan, central
and northern Taiwan, the Philippines, greater Seoul, the southern coast of
China, and southern Thailand, for example. There are many advantages to this
concentration (referred to by economists as agglomeration) such as the network effect of increased density of human expertise and resources, as well as
reduced logistics costs and cycle times. However, there is a price to pay in
increased risks, not unlike the risk created in an investment portfolio when it
lacks diversity and is overly concentrated in a sector.
The risks of geographic concentration of high-tech manufacturing were
brought into sharp relief in 2011, with the tsunami in Japan impacting both
high-tech and automotive production. That same year, floods in Thailand
served to punctuate this point.
When these disruptions occur, there is a scramble to assess the impact and
secure supply of those components or materials that will be in shortest supply.
There are winners and losers in that scramble.
A key part of the answer is understanding where the over-concentration vul-nerabilities exist. The most obvious type of over-concentration is over-reliance
on a single supplier. But increasingly the risk includes having too many suppliers clustered in the same geographic region. To understand risks of geographic
concentration, OEMs need visibility not just into whom they are buying from,
but where production is happening throughout multiple tiers of their supply
chain. This can be a daunting task.
Thankfully, there are some tools and services emerging from companies that
can help with this challenge. The high-tech OEMs and manufacturers with the
most advanced supply chain risk management programs are starting to invest
in getting visibility into multiple tiers of the supply chain. This may end up
being one of the most critical factors in determining the winners and losers
when the next disruption strikes.
2011 will turn out to be the norm, not the exception, in terms of disruptions
to the high-tech supply chain. Expect more of the same in 2012. Since dealing with geographic concentration risks is not an easy problem to solve, it
will take time for companies to build the capabilities to understand those
risks. Those that do it sooner will have an advantage when disruptions
strike, as they inevitably will.