13 March 2012 | Adam Leach
When an undersea quake measuring 9.0 on the Richter scale created a towering tsunami on 11 March last year, it wreaked havoc across Japan. The human price paid was huge, so too was the cost for businesses, both Japanese and those across the world as disruptions to the supply chain transmitted the impact to companies in the UK, the US and elsewhere.
As a result of the disaster, car manufacturer Toyota saw almost all its profits for the third quarter wiped out. General Motors in the US was also hit, having to temporarily shut down production, because it couldn’t get hold of key parts. Electronics company Pace issued a profit warning after it was forced to bring inventory purchases forward over scarcity fears and last week it announced profits for the year were halved as a result of disasters in Japan and Thailand.
In the UK, meanwhile, the BBC considered recycling old tape because it was unable to get new shipments.
It all served to highlight the importance of risk management and the increasing need to make supply chains more resilient. So a year on, what impact has it had and how have those affected responded?
One of the responses emerging over the past year is to increase the amount of intelligence and understanding of the supply chain.
Earlier this month, Toyota revealed that by the end of this month it will have collected data on contingency measures established by all its direct suppliers, which it will use to improve its continuity programme. It has also mapped the supply chains of more than half its suppliers, leading to the identification of a further 1,500 firms with links to its business.
A report published last year by the Business Continuity Institute (BCI) found that 40 per cent of all supply chain disruptions emanated from below the first tier supplier level. It is likely that one of the most long-lasting and significant impacts of the earthquake will be to put more focus further down the supply chain.
Wolfgang Kniese, CFO at T-Mobile Austria, told SM: “One thing we learned is you have to look one step further than your suppliers because one of the consequences of Japan was some handset manufacturers ran into problems. Usually, we look at our vendor’s vendors, but if all your vendors have the same supply chain behind them, that is a huge risk.”
In response to the earthquake, French carmaker PSA Peugeot Citroën, which was hit to the tune of €250 million (£209 million), is rolling out plans for all suppliers that were single sourcing to identify a secondary, or backup, supplier that it could use in case of a disruption to its primary provider.
The plan, which is being rolled out gradually, requires that the backup be located in a different country to the primary source.
As a result, if a similar disaster hits, while there would no doubt be disruption, the carmaker would likely be able to re-establish suppliers through its suppliers secondary supply chains.
Renesas Electronics saw its production capacity cut in half by disruptions to its supply chain and procurement in the wake of the disaster. In response, it highlighted the need to strengthen its business continuity plan, but, more importantly, to bring it in line with the plans of suppliers.
Following the quake, the company has been sharing information among its suppliers to formulate a cohesive and robust plan that takes account of potential disruptions. Like PSA Peugeot Citroën, the plan includes establishing a back-up supply chain or, as Renesas calls it, an “alternate production network”.
The response to an extreme event has been measured and Christos Tsinopoulos, senior lecturer in operations and project management at Durham Business School, for one, doesn’t expect companies to leave the country over fears of future events. “I would expect suppliers based in that region to respond with their own risk assessments of what they are doing [to mitigate risk or increase resilience].”
While it isn’t possible to develop a risk-free plan, it is possible, through sharing data, setting up secondary networks and working more closely with the supply chain, to be better prepared to face whatever the future holds. But while there has clearly been progress in factoring in risk, some believe more needs to be done to give risk management the prominence it deserves.
John Drzik, CEO of the Oliver Wyman Group and contributor to the recent Global Risks 2012 report by the World Economic Forum, tells SM: “[Risk management is] being rethought in the context of things like major floods, earthquakes and natural disasters. The trade off of costs is being more actively considered. But in general, risk management still has way to go in terms of moving up the agenda.”