The Japan Earthquake and Supply Chain Risk Management

In an average year, 134 strong earthquakes (magnitude 6.0 to 6.9 on the Richter scale) and 17 major or great earthquakes (magnitude of 7.0 or greater) take place around the world. Although many strike remote and less-developed sections, some hit major centers of economic activity. When they hit, they expose the vulnerability of global supply chains.

So begins Chapter 2 of “The Resilient Enterprise” by Dr. Yossi Sheffi, a professor at the Massachusetts Institute of Technology. The book was published in 2005, a few months after Hurricane Katrina struck New Orleans and a year after an earthquake triggered the deadly tsunami in Indonesia. Interestingly, the very next section of the chapter talks about the magnitude 7.2 earthquake that struck Kobe, Japan on January 17, 1995. In addition to killing about 6,000 people, the earthquake “damaged all of the transportation links in and around Kobe” and the port (the world’s sixth largest at the time) was “virtually destroyed…halting one-fifth of Japan’s export and import activities.” Dr. Sheffi goes on to write that “The full impact of the Kobe quake, however, would not be felt until days, weeks, even years afterward.”

History, and Mother Nature, have a cruel way of repeating themselves.

In the days after the Haiti earthquake last year, I wrote a piece titled “Haiti and the Role of Logistics in Disaster Relief” where I highlighted how logistics professionals from the military, private sector, and other organizations were applying their resources and expertise to the relief effort. Many of the lessons learned in Haiti, and from many other disaster relief efforts throughout the years, are undoubtedly being applied by the first responders in Japan today. The situation with Japan’s nuclear reactors, however, adds yet another layer of complexity and urgency to the task.

As with the Kobe earthquake, the full impact of last week’s earthquake on supply chains, particularly in the automotive and high-tech industries, won’t be known for some time (see “Plant Closures Imperil Global Supplies” from the Wall Street Journal). The most important priority right now for companies in the affected regions is the safety and well-being of their employees and families. Factories, warehouses, roads, trucks…all of these things can be replaced or rebuilt. Friends, colleagues, loved ones…those are the hardest losses to recover from.

The reality is that there is relatively little companies can do right now to minimize the impact of this disruption. Either you have been preparing for this type of disruption all along, taking the lessons learned from past disasters and building a “resilient” enterprise, or you have taken your chances and haven’t prepared effectively, believing that lightning won’t strike twice. The least impacted companies will be those that have been (among other things)…

  • sourcing critical parts from multiple suppliers, manufactured in multiple factories, located in multiple geographic regions;
  • using widely-available, standard components instead of proprietary, custom-built parts;
  • keeping excess manufacturing capacity in their factories;
  • designing and equipping their factories to build a wide portfolio of products;
  • implementing redundant IT systems and data centers;
  • using multiple modes of transportation, and working with multiple logistics partners.

In many ways, supply chain management is about managing risks, which is the central theme in Dr. Sheffi’s book and many other writings since (see “The Advancing Field of Supply Chain Risk Management” by my colleague Steve Banker). And since risks are dynamic in nature, with new ones emerging all the time, companies must continuously study the landscape and determine which risks are worth addressing now and how. Simply put, what costs and other tradeoffs are you willing to incur today to avoid a much costlier scenario tomorrow?

Our thoughts and prayers go out to everyone in Japan, especially all of the victims and their families. And a big “Thank you” to everyone assisting in the recovery effort, including our friends in the logistics industry.

Comments

  1. This is a very accurate assessment of the importance of risk management in logistics and operations. Unfortunately, there are only a few companies with advanced supply chain risk management practices, since most of the focus has been on supplier risk.

    For more insight into risk mitigation strategies, I also recommend Chapter 5 in David Simchi-Levi’s most recent book “Operations Rules’ , see http://www.operationsrules.com