Better safe than sorry: The flood c

Better safe than sorry: The flood crisis has highlighted the desirability of diversifying operations across multiple locations by Umesh Pandey

The unexpectedly huge scale of the ongoing flood crisis has driven home the need for companies to diversify their operations base after many saw their entire production process shut down.

Total damage has yet to be figured, but already the potential price tag is sending shivers down the spine of companies that had their entire operation in a single location or even based in one country.

"Yes, we've learned a lesson from this natural disaster. We thought we were safe having diversified our production facilities to three different locations," said Richard Han, the chief executive of Hana Microelectronics Plc.

Hana had one facility completely inundated and lost nearly 35% of its production capacity despite efforts to salvage its equipment and set it up at headquarters.

"When a person drives a car, they have one spare tyre. And if one tyre goes flat, you have a spare to fix it with for a while, while the probability of two tyres going flat is very low," said Mr Han when asked if he was ready for future mishaps.

Hana has three facilities - two in Thailand and one in China - and is contemplating changes to its production process whereby it would produce each of its products at all three locations so as to avoid disruption to its customers.

Mr Han said customers are the key to business. Large companies have insurance to cover damage including revenue loss, but customers are unlikely to wait for products to arrive and may shift to new suppliers instead

"This is something we are aware of, and that is why our wool inventory is in Europe, where we sell most of our wool products," said Aloke Lohia, the chief executive of Indorama Ventures Plc (IVL).

IVL's smallest business line is wool, accounting for less than 1% of revenue. But Mr Lohia says his company attaches importance to customers, as it is not easy to get them back once they leave.

Wool may account for only a very small part of the business, but IVL will buy the raw material in the spot market, look for spinning mills and deliver the goods to the customers as per their requirements until the company's Lop Buri factory can get back on its feet in another 3-6 months.

IVL, the world's largest producer of PET polymers and one of the largest for PTA polymers, operates its PET, packaging and wool businesses from the Lop Buri plant.

"The PET business is not going to be affected, as we have shifted production to Rayong and will service our customers from there," said Mr Lohia.

He said IVL had a similar experience in the US when Hurricane Katrina forced its plant there to shut down for a short while, and once again having multiple plants in that country helped it to maintain its customer base.

"In Asia too we have a diversified portfolio, with production facilities in Thailand [Rayong and Lop Buri], China and Indonesia," he said, adding that this enables the company to maintain its customer base without any problem.

Other companies are in a similar situation. They have diversified their operations to minimise risk as well as capture business opportunities in other markets.

Polyplex (Thailand), a leading producer of film packing, said diversification is key to keeping its operations going and maintaining its customer base.

With plants in Thailand and in Turkey, it is very serious about diversifying production, which is why it has continuously expanded its manufacturing base in both countries over the years.

Although Polyplex is not in a flood zone in Thailand, it has felt a low single-digit (1-2%) impact, as its customers either directly or indirectly have been affected.

Only 15-18% of the company's production is sold in Thailand.

Other companies such as Thai Union Frozen Products Plc have also said that diversification means they would likely feel a very mild effect even in the worst-case scenario.

But not all companies in Thailand have been able to diversify, and many have been completely inundated, especially small and medium-sized enterprises with a single operating base.

Hana workers attempt to salvage equipment from its inundated factory. With two other factories in Thailand and China, total production capacity was cut by only 35.