September 29, 2015

The El Niño Supply Chain Impact Heats Up

Wayne Caccamo

Factory-fireIntroduction: We recently published our El Niño Supply Chain Impact Analysis entitled El Niño: A Test of CPO Leadership and Your Supply Chain Resiliency Culture. Even our creative supply chain impact analysis experts didn’t anticipate forest fires and resulting air quality issues as one of the impacts to consider. The geographic scope of the impact (i.e. across country borders), is another surprising revelation. Here’s what’s going on in Southeast Asia right now and some takeaways for enterprises that have a manufacturing presence in the region.

Singapore Enveloped in Haze Brought by Indonesian Forest Fires

According to Bloomberg, thick smog has enveloped Singapore on Thursday yet again, pushing the air quality closer to the hazardous range. The land and forest fires in Indonesia's neighboring island of Sumatra blown in by southerly winds choked the island. The Pollutant Standards Index rose to 319 at 6:00 p.m. in South Singapore today where a reading between 201-300 is classified as very unhealthy and above 300, hazardous. Widespread haze is also persistent in Southern and Central Sumatra as per International Business Times.

According to AFP, 2,081 fire hotspots were recorded in the worst-affected region of Indonesia's Kalimantan and 290 in Sumatra on Thursday. Five people have died since the haze became critical over the month and more than 500,000 people across the archipelago have suffered respiratory problems. Hundreds of schools in Kalimantan and South Sumatra have been closed for a month, as per The Australian. According to International Business Times, pollution Standards Index level hit 1,400 in some parts of Central Kalimantan on Tuesday. The National Environment Agency (NEA) has advised citizens in Singapore to avoid outdoor activities since the haze situation is expected to worsen.

The same fire has also impacted air quality in Malaysia, with large parts of the country shrouded in smoky, haze smog. Malaysian authorities ordered school closures in Kuala Lumpur and neighboring states, as well as distributed free face masks, while the Marine and Aviation sectors have been advised to go on High Alert due to the worsening visibility. 

Fires as a Source of Potential Supply Chain Risk Are Not Unique to the Region 

This phenomenon is not completely new to the region. The 2013 Southeast Asian haze was a haze crisis during June and July 2013 that affected several countries in Southeast Asia, including Brunei, Indonesia, Malaysia, Thailand, as well as Singapore. The haze period was caused by large-scale burning in many parts of Sumatra and Borneo. Satellite imagery from NASA's Terra and Aqua satellites showed that the haze was mainly due to smoke from fires burning in Riau province, Indonesia. 

The 2013 Southeast Asian haze was notable for causing record high levels of pollution in Singapore and several parts of Malaysia. The 3-hour Pollution Standards Index in Singapore reached a record high of 401 on 21 June 2013, surpassing the previous record of 226 set during the 1997 South East Asian Haze. On 23 June, the Air Pollution Index (API) in Muar, Johor spiked to 746 at 7 a.m. which was almost 2.5 times above the minimum range of the Hazardous level thus resulting in the declaration of emergency in Muar and Ledang (which was afterwards lifted on 25 June in the morning), leaving the towns in virtual shutdown.

El Niño Induced Droughts in the Region Are Creating Additional Supply Challenges

The drought conditions tied to El Niño in Indonesia that precipitated and worsened the effects of the fires are not just a problem for neighboring Singapore. It should come as no surprise that Indonesia says some of its southern regions are experiencing drought because of El Niño. Some areas of the country have not had rain for six months. Wells in Wonigiri, in central Java, have run dry after nearly half a year without rain. Farmers have been hit hard, with monsoon rains expected to start two months later than usual due to El Niño.  Nearly 100,000 hectares of rice harvest have failed already. Farmers are now depending on financial support from the government for food, including basic necessities, like drinking water.

Key Takeaways and Recommendations

  • Air quality is not just a general health concern but can have a direct impact on factory production as laborers stay home to protect themselves or to care for children home as a result of school closings. Understand the factory locations in the effected regions of Singapore and Malaysia.
  • Specific industries that could be impacted by disrupted suppliers in the region include: food & agriculture, automotive, high tech, and industrial manufacturing. Note: The agriculture industry is an upstream supplier of raw materials (such as palm oil) used in life sciences and even high tech. See blog post: Update: The Potential Impact of El Niño on Industry Supply Chains
  • Drought-induced air quality issues resulting from forest fires is obviously one of many impacts (and the least obvious), but it should be put into the broader perspective of potential impacts and prioritized appropriately for proactive mitigation and emergency response preparedness.  Our El Niño Supply Chain Impact Analysis entitled El Niño: A Test of CPO Leadership and Your Supply Chain Resiliency Culture is a great place to start.

Download the El Niño Impact Analysis Now



Indonesia crop failure blamed on El Niño

Topics: supply chain risk management, supply chain event monitoring, El Nino