NASA’s report this week that the March earthquake in Japan directly resulted in the formation of icebergs in Antarctica was but the latest example of the quake’s widespread and long-lasting impact. When a 9.0 magnitude quake hit the east coast of Japan in March and caused a tsunami, the death toll was immense. In addition to the heartbreaking human misery was the breakdown of a large part of Japan’s industrial infrastructure; many of Japan’s noted nuclear power plants, manufacturing facilities and chemical plants were either damaged or shut down.
Nearly five months later when Honda reported a nearly 90% drop in its first quarter (April-June) revenues on August 1st, it showed how dramatically the earthquake and tsunami continue to reverberate along the fault lines that are global supply chains.
Honda said in a statement that the drop in revenues was “mainly caused by the impact of the Great East Japan Earthquake… and the unfavorable foreign currency translation effects.” A strong yen further battered losses in automobile production, along with decreased sales and higher raw material costs.
Other car manufacturers in Japan and many in the U.S. were also affected when parts were not delivered. Within days General Motors had to shut down a pickup truck plant due to lack of parts; and that was just the beginning. Automobile production and sales were not alone; recently mobile phone handset maker Sony Ericsson’s second quarter results were battered because it could not get necessary components from Japan. And parent company Sony suffered lower first quarter results because it had to suspend manufacturing at some plants in Japan due to shortages of raw materials, components and power following the earthquake.
The earthquake and its long-lasting aftershocks to global supply chains have prompted a complete rethink in supply chain management.
Inventories: From Asset to Liability
Since the mid 1990’s, companies have operated just-in-time manufacturing strategies in order to reduce costly inventories. Instead of being considered an asset, as had been the norm, inventory was suddenly considered the fat to cut. utilising a lean inventory strategy means that the chain never stops – nothing sits around at all, from source to manufacturing to production to sales. The modern mantra seemed to be: “Move it, sell it, get the cash”.
If a part or material was not core to the business, it was outsourced. At the same time, for the sake of ease, manufacturers shrank their supply lines down to one or two suppliers. Some even hired third party outsourcers called “contract fabricators” to engage and manage the suppliers. This meant farming out contracts to suppliers in all corners of the globe. The distances these goods now have to travel is further than ever before.
Depending upon one or two suppliers could be workable, but what if they were located in the same part of a country that had experienced a disaster, as they were in Japan? And because there were no buffers – inventories – when the link in the supply chain broke, it caused huge manufacturing delays at the other end. The BCI survey concluded that outsourcing, in particular in IT and manufacturing, often ultimately leads to reduced cost-benefits because of the greater exposure to supply chain disruption.
Delays or disruptions happen for many reasons. Catastrophic earthquakes and ash clouds are fairly unusual events, but they are joined by more everyday occurrences such as weather, IT and telecommunications outages, traffic, new regulations or third party service failures. BCI said that these types of incidents led to a loss of productivity for over half of businesses. And the damage is not limited to financial results: 20 per cent of those surveyed said that their brand or reputation had also taken a knock as a result of these disruptions.
The lesson here seemed to be: Don’t put all your eggs in one basket. For this reason many companies are now looking to increase and diversify their supply side, which increases supply chain complexity and increases the amount of events and information that needs to be managed. When disruptions occur, the velocity or flow of materials through the value chain is constrained or even shut down, and the supply of raw materials, production, or customer fulfillment is negatively impacted.
It is profound just how much Japan was affected by the earthquake and tsunami, and how far-reaching the fault lines of the supply chain were. The earthquake awakened supply chain managers to the dangers of having few suppliers with little geographic diversity, little visibility into their chains and no way of responding in time. The more advance notice a business can get to supply chain disruptions, the quicker it can anticipate and respond to them. In the face of continuous disruption and crisis, businesses need to increase their usage of advanced technology to radically improve their level of visibility of key events and to be able to dynamically reconfigure and optimise their supply chain processes. It’s time to change how we think about the chain.