Sunday, 20 March 2011

Japan's earthquake exposes global supply chain unpreparedness

Just-in-time (JIT) production techniques have revolutionized global business efficiency but as the recent Japanese earthquake and tsunami clearly show JIT is not without its disasters waiting to happen for those lacking foresight and preparedness. As pointed out in my blog last April 23, under the headline: "Has volcanic ash lessons for logistics," the Icelandic ash cloud should at least have spurred a rethink on JIT techniques but there seems little evidence of it.

The ash cloud was on a far lower disruption scale than the Japanese quake since it merely affected airfreight, although some 25% of the UK's freight business by value moves by air. Perhaps because of this low disruption factor, global businesses simply shrugged their shoulders. Hopefully, they will be less inclined to do so now.

JIT-oriented manufacturers are exposed to many disruptive supply risks and even the smallest and most unlikely of these can have a disproportionately huge impact on the bottom line. When a Southampton container crane collapsed in 2006, for example, while unloading parts for the Honda car plant in Swindon, the shortage of parts brought the entire plant to a standstill.

This time round, the Japanese quake and tsunami that have devastated much of north-east Japan could cost Japan's big three car makers a combined $1 billion hit to profits and that does not include damage to car plants. Moreover, in Britain Toyota has stopped all overtime working at its Burnaston plant, and General Motors said it would close two European plants because of component shortages.

There are also growing concerns that other manufacturing sectors, particularly electronics, will be disrupted by parts shortages. Producers of both high and low-tech products rely on components that, in some cases, are made by a single supplier, many of them Japanese. Japan, it seems, is home to nearly 100 manufacturing "choke points" that could affect businesses worldwide. YKK, for example, makes most of the world's zips while another company dominates the world market for bicycle gears.

There are techniques for efficient disaster recovery, anticipatory measures and production philosophies that could sidestep or ameliorate supply chain disruption*. Insurance companies, for example, have well-developed models of the likelihood of earthquakes, floods, hurricanes and tornadoes for America and other countries.

Volcanic eruptions are usually preceded by tremors but these signs are often ignored or dismissed by managers. Given that Japan is a high risk earthquake area does it make sense to have all one's eggs in one basket as regards certain vital parts? Wiser counsels would advise access to alternative sources not exposed to earthquakes and floods, even if that means partly financing new investment. This may be unwelcome news on Japan's job front but it is the greater good that must prevail.

The ramifications of the Japan quake, alas, have far-reaching consequences beyond the impacts on the supply chain. It is already panicking the financial and commodity markets which just could herald a setback to a delicately recovering global economy. A minor foretaste of this scenario occurred on January 4, 2006 when a strong earthquake hit the Gulf of California, a one in an 11-year event. Damage was insignificant but it briefly panicked the foreign exchange markets and pushed copper prices to new heights. Only weeks before, in my city desk column for Warehouse & Logistics News+, my concluding comment on the Katrina hurricane aftermath was: "There is a feeling in this column's bones that worse natural calamities are to come, including a tectonic event in the Gulf of California."

Readers need not concern themselves why I felt such an event was due soon but the lesson for all supply chain personnel is clear: Have some alternative supply sources in earthquake-free zones or future earthquakes could move the supply chain earth for you.
*See Yossi Sheffi's book: "The Resilient Enterprise," MIT Press, Cambridge, Massachusetts
+Warehouse & Logistics News, London, September 19, 2005