Japanese Catastrophe and the Dark Side of Global Supply Chains (1)

8/3/2019 Japanese Catastrophe and the Dark Side of Global Supply Chains (1)

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Japanese Catastrophe and the Dark Side of Global supply Chains

By Behzad Behdani

On 11 of March, one of the biggest earthquake recorded in history hit Japan coasts caused widespread destructionacross the country. The center of quake was about 120 km from the coast of Sendai, located in northern Japan,largely known as an agricultural and industrial region. The 9.0-magnitude earthquake was followed by more than250 aftershocks, 30 of them were of magnitude of 6 or more based on Guardian reports 1. The quake also triggeredextremely destructive tsunami waves which was estimated to be 10 meters in height (33 feet) and swept inland inmany places swamping everything in its path. Unfortunately, this was not the end of story; after plant's coolingsystem were knocked out by quake, an explosion in one of the reactors of Fukushima Daiichi nuclear plant sparkedfresh fear of another catastrophe reactor meltdown and radiation poisoning. Several hours after the explosionand fire, elevated levels of radiation were detected in Tokyo, 250 km away, though government officials said therewas no health risk there. Afterward, the explosion at unit 2 and the fire at unit 4 of the plant did get Japaneseofficials and people more freaked out 2.

About 20 days after first explosion, the crisis in Fukushima nuclear power plant is still there; though, based onofficial view, Japan's troubled Fukushima Daiichi nuclear power plant is slowly being brought under control 3.

Besides interruptions in the power system of country, several other infrastructures are affected by disaster. DowJones reports that Cosmo Oils 220,000 barrel Chiba refinery caught fire during or shortly after the earthquake, andthat another, unspecified refinery was also on fire. State-owned JX Holdings shut down its 189,000 barrel per day(b/d) Kashima refinery and its 340,000b/d Negishi refinery, and the 145,000b/d Sendai plant has also been closed,according to reports 4. More importantly, the transportation infrastructures of country including road, rail andports were severely ruined by disaster. Engineers at the University of Tokyo listed 17 bridges that had beenwashed away by the tsunami; five sewage plants either damaged or destroyed; flooding at one damaged dam; and

dozens of landslides and deposits of debris that have closed roads. In one case, they reported tsunami damagealong an 18-mile stretch of coastal roads south of Iwaki 5.

Over all these problems, the concerns about the risk of food safety in the regions around damaged nuclear plants,not only raised the anxiety among Japanese citizens, but also made several countries including US, China, HongKong and South Korea to ban some food imports from the disaster zone 6,7.

The extent of financial damage of tragedy is still unclear. The last assessment by Japan government on March 23estimated 16 trillion to 25 trillion yen (189 to 309 billion US dollars) in direct damage to houses, factories andinfrastructure 8. Obviously, this was just an estimation of direct effects of disaster and the power shortages andsupply-chain problems influencing the country's production of goods including cars, electronics and machinery willincrease this value.

What is presented in following is a brief overview of how several supply chains around the globe are affected byThoku earthquake in Japan. The impacts on the industrial plants and supply chains are discussed in three mainsteps. Of course, these steps are based on the information that is currently available and the full impact of thiscatastrophe on global supply chains needs more time to be completely understood.


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FIRST EPISODE- MOTHER OF NATURE

The first impact of disaster was its direct effect on the business in the region. Most of companies havingproduction plants in north and east of country reported damage to their facilities. In addition, the fear overaftershocks made several factories to evacuate their workers and close their plants and offices for several days.

Among electronic and semiconductor companies vastly affected by disaster, Texas Instruments reports itssemiconductor fab site suffered heavy damage from the earthquake 9. Renesas, the world's largest producer of microcontrollers, formed from the former Hitachi, Mitsubishi and NEC semiconductor operations, has six or sevenfacilities that have been hard hit or shut down 10. NEC suffered damage at five plants, including a key facility fortelecommunications equipment in Fukushima Prefecture, the Nikkei said 11. Fujitsu reported damage to thebuildings and production facilities in six of its plants in Iwate, Miyagi and Fukushima 12.

Automakers also reported damage to numerous factories and offices; Honda said one employee was killed at aresearch and development center in Tochigi, north of Tokyo, when a wall collapsed. More than 30 Hondaemployees and 2 Nissan employees in Tochigi were injured and Hondas assembly plant in Sayama had to beclosed 13.

The supply chain affected by quake and tsunami are not limited to high tech or automakers; some of food supplychains are also directly influenced by disaster. The region hit by the tsunami is known for growing rice, and there islots of concerns over the temporary entrance of salt water into paddies 14. Moreover, to examine whether ricepaddies are contaminated with radioactive substances to allow cultivation, the agricultural ministry is consideringasking farmers in Fukushima and some other prefectures to delay rice planting for a few weeks amid growingconcerns about radiation leaks from the Fukushima Daiichi nuclear power plant 15. It is uncertain as to how thedisaster will come into play in food market but the increase in food price (at least for some products) is not beyondthe expectations.

SECOND EPISODE- LACK OF INFRASTRUCTURE

Despite some plants were influenced directly by quake and tsunami, the first-looking good news for Japaneconomy was that industrial districts and important ports are mostly located in the south of country. However,some of companies that did not hit by disaster or their production facilities were outside the area of mandatoryevacuation felt the disaster impacts indirectly; chiefly through extensively-ruined infrastructures and power outagein the country.

The first and probably most important infrastructure affected by disaster -which itself has tremendous effect onthe operation of industrial supply chains- was energy infrastructure. The quake took out the nuclear powergeneration facility at Fukushima Nuclear Power Plant. Consequently, the power supply of north part of country

was severely restricted. The power outage has forced the production of many industrial plants to come to a stop.Companies staffs in Tokyo and elsewhere were encouraged to leave to turn off lights and compute rs, work at 3pmand walk home to save strain on power supplies. Moreover, some manufacturers throughout Japan havesuspended operations to conserve power and decrease demand on public services 16.

The oil sector also felt the impact as Reuters reported tha t 1.4m bbl/day of Japans 4.5m bbl/day refining capacityand 1.7m tones of naphtha cracking capacity remain off line 17.


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The damage to transportation infrastructure was also devastating. Based on National Police Agency estimation, thetsunami and quake damaged 1,450 roads and 51 bridges and triggered 120 landslides 18. Disruption also influencedthe operation of ports as several cargo shippers reported that major Japanese ports were closed following theearthquake, though the shutdowns may be precautionary 19.

The damage to infrastructures spread quickly the effects of disaster to whole country. Accordingly, rather than thephysical destruction of assets, most of Japanese supply chains were disrupted by significant interruption in energyinfrastructures and road, rail and port access.

Just as an example of this indirect effect of quake on the operation of Japanese SC, Japan's largest exporter of consumer electronics, Sony, suspended operations at five plants in central and southern Japan. Most of theseplants were not damaged by earthquake but they were chiefly hit due to parts shortages stemming fromtransportation disruptions following the disaster 20. Some of these plants are announced to be close or reduceoutput until end of March 21. Moreover, the production in some plants would be interrupted by the rollingblackouts and power shortage 22. To handle the situation, the company announced in a statement that i f theshortage of parts and materials supplied to these plants continues, we will consider necessary measures, includinga temporary shift of production overseas" 23.

Similar stoppage in production is reported for other companies like Hitachi, Caterpillar, Samsung and Toyota. Inmost cases the operation of industrial supply chain is impacted by the ensuing interruptions in the power supplyand lack of raw materials because of extensive damage to transportation infrastructure.

All these cases illustrate how smooth operation of supply chains depends on the proper functioning of infrastructures. On the other hand, some infrastructures might also be affected by disruptions in supply chains andindustrial networks. The airline industry of Japan, for example, is indirectly affected by earthquake as reported thatJapan's airports could run out of jet fuel in 10 days without emergency measures 24. This is partly due to theeffect of quake and tsunami on refining capacity of country and oil products distribution system.

This shows how different infrastructures performance not only depends on the appropriate functioning of otherinfrastructures but also can be disrupted by abnormal events in industrial supply chains. To manage the situation,airlines flying to Japan are being encouraged by International Air Transport Association (IATA) to carry enough fuelfor at least part of the return journey 25. Meanwhile, some aircraft on short-haul flights are even voluntarily leavingexcess fuel in Japan to top up supplies, a process known as "tankering" according to IATA 26.

The airline industry has a similar previous experience after an explosion at Total SA's Buncefield oil-storage depotnear London in 2005 reduced supplies to London Heathrow and Gatwick Airports 27, 28 .

THIRD EPISODE- THE GLOBAL EFFECT

The dominance and important role of Japanese companies in some specific sectors expanded the damage to thesupply chains beyond Japans shores. Two important sectors feel the hardest global hits by Japan disaster areelectronics/semiconductor and automobile supply chains. To have a big picture, Japan produced about 14% worthof $ 1.6 billion electronics equipment in 2010 worldwide. Japanese suppliers also accounted for more than one-fifth of global semiconductor production in 2010 29. With this important position for Japanese companies in themarket, the first global impact was on component pricing in spot markets mainly due to the psychological impactof the disaster. Pricing for higher-density NAND flash already has climbed by as much as 10 percent on the spot


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market, which buyers use to procure relatively small quantities of parts 30. Meanwhile, some companies likeSamsung and hynix have stopped announcing prices information for the spot market 31. This is, especially, becauseof uncertainty about availability of raw material and the expected time that plants can resume their production.Furthermore, after resuming the plants most of affected plants must handle the backlog of orders which may itself increase uncertainty on the timing of available raw materials for customers.

Another immediate influence of disaster that is also because of uncertainty around the situation- is thesignificant fall in the share price of Japanese companies in most of stock markets around the world. Just asexamples, since the March 11 earthquake, share prices of Nissan, Toyota and Honda have fallen 13.3%, 7.2% and6.7%, respectively 32.

However, the most important global effect of disaster is on the supply chains of companies sourcing their maincomponents and raw materials from Japan. The disruptions and production shutdown in Japans manufacturingplants rippled through an interconnected complex network of supply chains and influenced many companiesaround the globe.

In auto industry, Toyota slowed down some North American production as most parts for Toyota's North

American-built vehicles come from about 500 suppliers in Japan. The company said it continues to receive partsfrom Japan that were already in the pipeline, limiting the immediate impact of the disruption there 33. Supply chaindisruptions will also force the company to delay introduction of two new additions to the popular Toyota Priushybrid model that is built only in Japan 34. To cope with disruption, Toyota starts finding alternative sources throughclose interactions with its suppliers 35.

GM also had to shut down temporarily one production plant in Louisiana for lack of Japanese-made parts. As areaction to this disruption in its supply chain, GM started looking to slow down production of low-selling models 36.GM had a similar problem in its supply chain in 1996 when the stoppage of components from a brakesupplier factory for 18 days led to interruptions in the production of 26 assembly plants and the estimatedreduction in quarterly earnings was around $0.9 billion 37. In another event, the West Coast Port Lockout in

2002, NUMMI, Inc., the joint venture between Toyota and GM, experienced a significant shortage of parts toassemble its cars. In order to continue with production, the company used air transportation to ship some partsfrom Asia, which increased the cost of every car by $300 to $600 38.

Similar supply issues may influence the normal operation of supply chain for other automakers, as Japan importsabout 2.5 million engines and 8.5 million transmissions to the U.S. every year 39.

Another leading company that is likely to be affected by disaster is Apple 40. Apple suppliers, Mitsubishi GasChemical and Toshiba, are both had a temporary shutdown to assess damage from the earthquake. As a result,component delays for some Apple products, including the iPad 2 and iPhone 4, are expected through the Junequarter 41.

To better manage the effects of Japan quake on its supply chain, Apple might be willing to employ the lessonslearned in a previous similar disaster, Taiwan earthquake in 1999. In 21 st of September 1999, a big earthquake hitthe Chi-Chi region in Taiwan. Consequently, power outages and damaged equipment halted production in severalTaiwanese factories supplying PC components to numerous companies among them two main competitors in themarket; Apple and Dell. However, the reaction of these two companies to this disruption in supply could not bemore different. Apple that had announced the launch of its new products and received thousands of order- facedproduct backlogs due to component shortages and inability to alter product configurations; an abnormal situationthat resulted in many canceled orders and consumer complaints 42, 43 . On the other hand, Dell (by changing its


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pricing strategy) influenced demand toward products with available components through direct sales model. Theability of Dell to steer customers to where Dell wants them by selling the available configurations increased itsthird quarter earnings by 41% over the same period of previous year in spite of disaster in Taiwan 44.

Undoubtedly, Apple is not the only computer electronics and IT company that will feel the effect of disaster in itsglobal supply chain. Japan is the worlds largest supplier of silicon used to make semiconductor chips at about 60percent of the global total 45. If this supply is disrupted due to the logistical and infrastructure challenges, an impactin the business of many parts and products such as NAND flash memory, DRAM, microcontrollers and LCD panels isnot beyond expectations. Of course, the global supply chain of many companies has several weeks of excesscomponent inventory in the pipeline for semiconductor. Because of this, the shortages are not likely to appearuntil the end of March or the start of April 46. Based on this, some companies like Nokia estimated that the eventsin Japan will not have a significant impact on the companys first quarter results . On the other hand, the currentshortages and their price impact are likely to remain until the third quarter 47.

Some experts believe that this is just the beginning and as time goes by, we might be able to have a better pictureof disaster damage to global supply chains around the world. We need more time to see how companies will figureout to supply every little part for their complex products- the little parts that shortage of any of them could shut

down an assembly line.

And finally

Every year a number of catastrophic events such as earthquake, flood and hurricanes take place around the worldfrom which just a few are happening in major centers of trade and industry. However, those rare events inimportant areas help us to evaluate the vulnerability of our global supply chains to disruptions and our capabilitiesto cope with them.

Easy to remember that less than one year ago, the Iceland volcano and following closure of European space had

major impacts on the operation of supply chains for many companies like HP, BMW, Nissan, Samsung and LG 48, 49 .And now, Japan earthquake reminds us of the effects of global sourcing on the performance and even continuity of supply chains. Just considering the effect of these two events, it seems a good time to test our beliefs about how asupply chain must be designed and managed in the uncertain business environment.

The 90s trends in managing supply chains such as Lean Production, Global Outsourci ng and Single Sourcingwere superior and (cost- effective) options for Stable environments. But, to work in a complex turbulent businessenvironment of 21 st century with volatile demand for customers, high level of competition, short product lifecycles, etc., we definitely need to revise some of our decisions and change our mindset.

We must know that by outsourcing part of production, we experience two phenomena loss of control and loss of

visibility50

. This loss of control and visibility (that is reflected in the uncertainty about the situation in supply chain),not only limit our ability to detect disruptions or have a complete picture of situation, but also reduce the degreesof freedom we have to manage abnormality.

We must be aware that the global sourcing contributes to the structural complexity of our supply chains 51and amore complex supply chain is more prone to disruptions too 52, 53 . In addition, coupling global sourcing with leanproduction might be fatal strategic decision for a supply chain; because it leaves very little space for companies tohandle abnormal situations in their supply chains. Additionally, as Perrow discusses in his Normal Accident


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Theory when our system is very comple x (when there is low buffer in the system and when there is high level of interactions in the system), the accident in the system is normal and unavoidable 54. Consequently, due to ourglobal complex supply networks, abnormal event in one specific region in the world is not local anymore; itsimpacts will go quickly beyond the borders of countries and continents.

Of course, these are just some general lessons might be learned and some common assumptions might be re-evaluated after a massive disaster such as earthquake in Japan. Each company can evaluate the effects on itssupply chain and comes with a list of lessons for its specific company; a list that hopefully helps us to think aboutwhat must be done before next big event in the supply chains. That big event might be a closure in Rotterdam orSingapore port because of extremely bad weather or labor strike; a new war in north of Africa or south of America;or social instability in the People Republic of China in 2015.

The world is different now; not onl y must we be ready to face known -known and known -unknown risks in oursupply chains but also the list of unknown -unknown root causes that may affect our supply chain is developingvery fast and every day. Probably, it is the good time to give Risk Management the credit it deserves in supplychains management; besides, a good moment to think of supply chains that are optimized both for costs and risks.

Notes:

1- P. Allen, C. Oliver and S. Rogers, Japan earthquake - the worst-affected areas and the nuclear risk , retrieved 31March 2011, .

2- D. Muir, J. Hopper and D. Schabner, Japan Earthquake: Radiation Leaking After Fukushima Nuclear Plant Explodes , retrieved 31 March 2011, .

3- W. Ide, US Nuclear Officials: Japan Nuclear Plant Slowly Recovering , retrieved 31 March 2011,

.

4- ---, Japan LNG Imports to Increase after Quake Hits Energy Infrastructure , retrieved 31 March 2011, .

5- H. Fountain, Extent of Damage to Japans Infrastructure Still Unclear , retrieved 31 March 2011,.

6- H. Cooper and M. Willacy, Japan earthquake - the worst-affected areas and the nuclear risk , retrieved 31 March2011, .

7- J. Park and C. Mee-young, South Korea bans some Japan food on radiation fears , retrieved 31 March 2011,.

8- ---, Japan says quake rebuilding to cost as much as 25tn yen , retrieved 31 March 2011,.

9- L. Walsh, Japan Earthquake Disrupts Tech Supply Chain , retrieved 31 March 2011,.
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10- M. Maisto, Effect of Japan Quake on Semiconductor Industry Still Unclear , retrieved 31 March 2011, .

11- G. Jayakumar, UPDATE 1-NEC, Fujitsu to delay personnel changes - Nikkei , retrieved 31 March 2011, .

12- ---, Notice Regarding Impact of Earthquake in the Tohoku Region of Japan , retrieved 31 March 2011,.

13- B. Wassener and C. V. Nicholson, In Quakes Aftermath - Japanese Companies Try to Take Stock , retrieved 31March 2011, < http://www.nytimes.com/2011/03/12/business/global/12yen.html?partner=rss&emc=rss >.

14- ibid.

15- ---, Govt May Ask Farmers to Delay Rice Planting amid Radiation Scare , retrieved 31 March 2011, .

16- N. Davis, INSIGHT: Japan earthquake's impact on supply chains , retrieved 31 March 2011, .

17- ---, TABLE-Japan refinery operations status after quake , retrieved 31 March 2011, .

18- ---, Japan quake, tsunami could cost $309 bn , retrieved 31 March 2011, .


20- ---, Sony suspends production at plants in Japan , retrieved 31 March 2011,.

21- ibid.

22- ibid.

23- I. Reynolds, Sony says supply-chain woes to affect 5 more plants , retrieved 31 March 2011, .

24- C. Jasper, Japan's airports have fuel for just 10 days , retrieved 31 March 2011, .

25- ibid.

26- ibid.

27- ibid.

28- D. White, Buncefield: One Year Later , retrieved 31 March 2011,.
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29- B. Cahiles-Magkilat, Japan earthquake disrupts electronics supply chain , retrieved 31 March 2011, .

30- D. Ford, Japanese Earthquake to Impact Component Supply and Pricing , retrieved 31 March 2011, .

31- J. Oram, How Japan Earthquake Affects the Global Memory Supply Chain , retrieved 31 March 2011,.

32- ---, Libyan war, Japanese earthquake; Impact over the auto industry! , retrieved 31 March 2011, .

33- J. Crawley, Toyota to slow some North American production , retrieved 31 March 2011,.


35- J. Crawley, Toyota to slow some North American production , retrieved 31 March 2011,.

36- ibid.

37- N. Radjou, Adapting to supply network change , Report, Forrester Research Inc., Cambridge, MA, 2002.

38- Y. Sheffi, the Resilient Enterprise Overcoming Vulnerability for Competitive Advantage . Cambridge, MA: MITPress, 2005.

39- E. Fedewa, IHS- Japan Crisis: Transmission and Engine Losses , retrieved 31 March 2011, .

40- D. Frommer, Apple Supply Chain Temporarily Affected By But "Demand Stronger Than Ever" , retrieved 31March 2011, < http://www.businessinsider.com/gene-munster-apple-supply-demand-2011-3 >.

41- ibid.

42- Y. Sheffi, the Resilient Enterprise Overcoming Vulnerability for Competitive Advantage . Cambridge, MA: MITPress, 2005.

43- C. S. Tang, Robust strategies for mitigating supply chain disruptions , Int. J. Logist.: Res. Applicat., vol. 9, pp. 33

45, 2006.

44- ibid.

45- D. Ford, Japanese Earthquake to Impact Component Supply and Pricing , retrieved 31 March 2011, .

46- ibid.
http://www.mb.com.ph/articles/309819/japan-quake-disrupts-electronics-supply-chain-says-seipihttp://www.isuppli.com/Semiconductor-Value-Chain/News/Pages/Japanese-Earthquake-to-Impact-Component-Supply-and-Pricing.aspxhttp://www.isuppli.com/Semiconductor-Value-Chain/News/Pages/Japanese-Earthquake-to-Impact-Component-Supply-and-Pricing.aspxhttp://www.brightsideofnews.com/news/2011/3/14/how-japan-earthquake-affects-the-global-memory-supply-chain.aspxhttp://www.brightsideofnews.com/news/2011/3/14/how-japan-earthquake-affects-the-global-memory-supply-chain.aspxhttp://www.inautonews.com/libya-war-japan-earthquake-impact-over-the-auto-industryhttp://www.reuters.com/article/2011/03/24/us-usa-toyota-idUSTRE72M8QS20110324http://www.nytimes.com/2011/03/12/business/global/12yen.html?partner=rss&emc=rsshttp://www.reuters.com/article/2011/03/24/us-usa-toyota-idUSTRE72M8QS20110324http://www.oesa.org/Action-Alerts/IHS-Japan-Crisis-Engine-and-Transmission-Output-Losses.pdfhttp://www.businessinsider.com/gene-munster-apple-supply-demand-2011-3http://www.isuppli.com/Semiconductor-Value-Chain/News/Pages/Japanese-Earthquake-to-Impact-Component-Supply-and-Pricing.aspxhttp://www.isuppli.com/Semiconductor-Value-Chain/News/Pages/Japanese-Earthquake-to-Impact-Component-Supply-and-Pricing.aspxhttp://www.isuppli.com/Semiconductor-Value-Chain/News/Pages/Japanese-Earthquake-to-Impact-Component-Supply-and-Pricing.aspxhttp://www.isuppli.com/Semiconductor-Value-Chain/News/Pages/Japanese-Earthquake-to-Impact-Component-Supply-and-Pricing.aspxhttp://www.businessinsider.com/gene-munster-apple-supply-demand-2011-3http://www.oesa.org/Action-Alerts/IHS-Japan-Crisis-Engine-and-Transmission-Output-Losses.pdfhttp://www.reuters.com/article/2011/03/24/us-usa-toyota-idUSTRE72M8QS20110324http://www.nytimes.com/2011/03/12/business/global/12yen.html?partner=rss&emc=rsshttp://www.reuters.com/article/2011/03/24/us-usa-toyota-idUSTRE72M8QS20110324http://www.inautonews.com/libya-war-japan-earthquake-impact-over-the-auto-industryhttp://www.brightsideofnews.com/news/2011/3/14/how-japan-earthquake-affects-the-global-memory-supply-chain.aspxhttp://www.brightsideofnews.com/news/2011/3/14/how-japan-earthquake-affects-the-global-memory-supply-chain.aspxhttp://www.isuppli.com/Semiconductor-Value-Chain/News/Pages/Japanese-Earthquake-to-Impact-Component-Supply-and-Pricing.aspxhttp://www.isuppli.com/Semiconductor-Value-Chain/News/Pages/Japanese-Earthquake-to-Impact-Component-Supply-and-Pricing.aspxhttp://www.mb.com.ph/articles/309819/japan-quake-disrupts-electronics-supply-chain-says-seipi


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47- ibid.

48- ---, Marsh- Iceland Volcano Fallout Could Impact supply Chain Resilience , retrieved 31 March 2011, .

49- ---, Ash hits Nissan and BMW factories , retrieved 31 March 2011,

.

50- G.A. Zsidisin, S.A. Melnyk and G.L. Ragatz, An institutional theory perspective of business continuity planning for purchasing and supply management , International Journal of Production Research 43 (16), pp. 3401-3420, 2005.

51- K.B. Hendricks and V.R. Singhal, An empirical analysis of the effects of supply chain disruptions on long-runstock price performance and equity risk of the firm , Production and Operations Management 14 (1), pp. 35 52,2005.

52- M. Christopher and H.L. Lee, Mitigating supply chain risk through improved confidence , International Journal of Physical Distribution & Logistics Management 34 (5), pp. 388 396, 2004.

53- C. Perrow, Normal Accidents, Basic Books, New York (1984).

54- ibid.
http://global.marsh.com/news/press/pr2010April22.phphttp://global.marsh.com/news/press/pr2010April22.php

Japanese Catastrophe and the Dark Side of Global Supply Chains (1)

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