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Rethinking the Supply Chain

June 28, 2011 by Mark Freedman, Satoshi Komiya, Joe Manget, Pierre Mercier, and Naoki Shigetake
June 28, 2011

Japan’s devastating earthquake wreaked havoc on global supply chains. Companies need to get used to such disruptions, however. According to a recent study, the number of weather-related natural disasters has steadily increased over the last 30 years—from fewer than 400 events in 1980 to more than 1,000 by 2008. Moreover, growing protectionism—for example, stringent export tariffs—has added to the uncertainty. And after years of falling trade barriers, mature and emerging economies alike are retrenching as they struggle to recover from the Great Recession. Therefore, as global business expands, the odds of supply chains being affected—either directly or indirectly—by a major or minor disruption grow exponentially.

To protect themselves, companies must reevaluate the way they source their raw materials and products. In this article—the latest in a series about the impact of the Higashi-Nihon earthquake on Japan and the global community—we look at how companies can do so by managing for uncertainty and making their supply chains more flexible and dynamic.

Disrupting Supply Chains

Much has been written about the ripple effects of Japan’s earthquake on global supply chains, particularly in the consumer electronics and auto industries. But other sectors have been affected as well. For instance, seafood supplies from the country’s fishing industry could be interrupted for a year or more, and mothers in South Korea set off a buying frenzy over Japanese diapers, fearing that their favorite brands may soon be unavailable. And while many medical-device plants were temporarily closed, those that remained open had some customers requesting evidence that products were free of radiation. Some analysts predict that as much as 5 to 10 percent of global output in 2011 will be affected in some way by Japan’s disaster.

Companies in Japan are showing remarkable resilience in the face of such disruptions, in part because of their well-developed disaster-management skills. According to a press release from the country’s Ministry of Economy, Trade, and Industry, more than 60 percent of manufacturers in the affected areas have largely recovered from the damage they suffered, with the rest expected to have production fully restored by the end of September this year. Even so, their supply chains have been damaged. Most companies report having a hard time getting components, parts, and raw materials, mainly because their suppliers and their suppliers’ suppliers were also affected.

The particular challenge for Japanese companies is this: since they typically source most of their raw materials and components—or inputs—domestically, they must now start extending their supply chains beyond Japan’s borders and seek alternative supply sources, mainly in China and other parts of Asia. This challenge is very different from that faced by U.S. and European companies, which rely more on local suppliers. But the solution for all companies is the same: creating a flexible and dynamic supply chain.

Munich RE, “Natural Catastrophes 2010: Analyses, Assessments, Positions,” Topics GEO, February 2011.