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 destruction across 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 than 1 250 aftershocks, 30 of them were of magnitude of 6 or more based on Guardian reports . The quake also triggered extremely destructive tsunami waves which was estimated to be 10 meters in height (33 feet) and swept inland in many places swamping everything in its path. Unfortunately, this was not the end of story; after plant's cooling system were knocked out by quake, an explosion in one of the reactors of Fukushima Daiichi nuclear plant sparked fresh fear of another catastrophe reactor meltdown and radiation poisoning. Several hours after the explosion and fire, elevated levels of radiation were detected in Tokyo, 250 km away, though government officials said there was no health risk there. Afterward, the explosion at unit 2 and the fire at unit 4 of the plant did get Japanese 2 officials and people more freaked out . About 20 days after first explosion, the crisis in Fukushima nuclear power plant is still there; though, based on 3 official view, Japan's troubled Fukushima Daiichi nuclear power plant is slowly being brought under control . Besides interruptions in the power system of country, several other infrastructures are affected by disaster. Dow Jones reports that Cosmo Oils 220,000 barrel Chiba refinery caught fire during or shortly after the earthquake, and that 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, 4 according to reports . More importantly, the transportation infrastructures of country including road, rail and ports were severely ruined by disaster. Engineers at the University of Tokyo listed 17 bridges that had been washed 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 damage 5 along an 18-mile stretch of coastal roads south of Iwaki . 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, Hong 6,7 Kong and South Korea to ban some food imports from the disaster zone . The extent of financial damage of tragedy is still unclear. The last assessment by Japan government on March 23 estimated 16 trillion to 25 trillion yen (189 to 309 billion US dollars) in direct damage to houses, factories and 8 infrastructure . Obviously, this was just an estimation of direct effects of disaster and the power shortages and supply-chain problems influencing the country's production of goods including cars, electronics and machinery will increase this value. What is presented in following is a brief overview of how several supply chains around the globe are affected by Thoku earthquake in Japan. The impacts on the industrial plants and supply chains are discussed in three main steps. Of course, these steps are based on the information that is currently available and the full impact of this catastrophe on global supply chains needs more time to be completely understood.

FIRST EPISODE- MOTHER OF NATURE The first impact of disaster was its direct effect on the business in the region. Most of companies having production plants in north and east of country reported damage to their facilities. In addition, the fear over aftershocks 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 its 9 semiconductor fab site suffered heavy damage from the earthquake . Renesas, the world's largest producer of microcontrollers, formed from the former Hitachi, Mitsubishi and NEC semiconductor operations, has six or seven 10 facilities that have been hard hit or shut down . NEC suffered damage at five plants, including a key facility for 11 telecommunications equipment in Fukushima Prefecture, the Nikkei said . Fujitsu reported damage to the 12 buildings and production facilities in six of its plants in Iwate, Miyagi and Fukushima . Automakers also reported damage to numerous factories and offices; Honda said one employee was killed at a research and development center in Tochigi, north of Tokyo, when a wall collapsed. More than 30 Honda employees and 2 Nissan employees in Tochigi were injured and Hondas assembly plant in Sayama had to be 13 closed . The supply chain affected by quake and tsunami are not limited to high tech or automakers; some of food supply chains are also directly influenced by disaster. The region hit by the tsunami is known for growing rice, and there is 14 lots of concerns over the temporary entrance of salt water into paddies . Moreover, to examine whether rice paddies are contaminated with radioactive substances to allow cultivation, the agricultural ministry is considering asking farmers in Fukushima and some other prefectures to delay rice planting for a few weeks amid growing 15 concerns about radiation leaks from the Fukushima Daiichi nuclear power plant . It is uncertain as to how the disaster will come into play in food market but the increase in food price (at least for some products) is not beyond the expectations.

SECOND EPISODE- LACK OF INFRASTRUCTURE Despite some plants were influenced directly by quake and tsunami, the first-looking good news for Japan economy 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 mandatory evacuation felt the disaster impacts indirectly; chiefly through extensively-ruined infrastructures and power outage in the country. The first and probably most important infrastructure affected by disaster -which itself has tremendous effect on the operation of industrial supply chains- was energy infrastructure. The quake took out the nuclear power generation 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 computers, work at 3pm and walk home to save strain on power supplies. Moreover, some manufacturers throughout Japan have 16 suspended operations to conserve power and decrease demand on public services . The oil sector also felt the impact as Reuters reported that 1.4m bbl/day of Japans 4.5m bbl/day refining capacity 17 and 1.7m tones of naphtha cracking capacity remain off line .

The damage to transportation infrastructure was also devastating. Based on National Police Agency estimation, the 18 tsunami and quake damaged 1,450 roads and 51 bridges and triggered 120 landslides . Disruption also influenced the operation of ports as several cargo shippers reported that major Japanese ports were closed following the 19 earthquake, though the shutdowns may be precautionary . The damage to infrastructures spread quickly the effects of disaster to whole country. Accordingly, rather than the physical destruction of assets, most of Japanese supply chains were disrupted by significant interruption in energy infrastructures 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 these plants were not damaged by earthquake but they were chiefly hit due to parts shortages stemming from 20 transportation disruptions following the disaster . Some of these plants are announced to be close or reduce 21 output until end of March . Moreover, the production in some plants would be interrupted by the rolling 22 blackouts and power shortage . To handle the situation, the company announced in a statement that if the shortage of parts and materials supplied to these plants continues, we will consider necessary measures, including 23 a temporary shift of production overseas" . Similar stoppage in production is reported for other companies like Hitachi, Caterpillar, Samsung and Toyota. In most cases the operation of industrial supply chain is impacted by the ensuing interruptions in the power supply and 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 and industrial networks. The airline industry of Japan, for example, is indirectly affected by earthquake as reported that 24 Japan's airports could run out of jet fuel in 10 days without emergency measures . This is partly due to the effect 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 other infrastructures 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 fuel 25 for at least part of the return journey . Meanwhile, some aircraft on short-haul flights are even voluntarily leaving 26 excess fuel in Japan to top up supplies, a process known as "tankering" according to IATA . The airline industry has a similar previous experience after an explosion at Total SA's Buncefield oil-storage depot 27, 28 near London in 2005 reduced supplies to London Heathrow and Gatwick Airports .

THIRD EPISODE- THE GLOBAL EFFECT The dominance and important role of Japanese companies in some specific sectors expanded the damage to the supply chains beyond Japans shores. Two important sectors feel the hardest global hits by Japan disaster are electronics/semiconductor and automobile supply chains. To have a big picture, Japan produced about 14% worth of $ 1.6 billion electronics equipment in 2010 worldwide. Japanese suppliers also accounted for more than one29 fifth of global semiconductor production in 2010 . With this important position for Japanese companies in the market, the first global impact was on component pricing in spot markets mainly due to the psychological impact of the disaster. Pricing for higher-density NAND flash already has climbed by as much as 10 percent on the spot

market, which buyers use to procure relatively small quantities of parts . Meanwhile, some companies like 31 Samsung and hynix have stopped announcing prices information for the spot market . This is, especially, because of 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 the significant fall in the share price of Japanese companies in most of stock markets around the world. Just as examples, since the March 11 earthquake, share prices of Nissan, Toyota and Honda have fallen 13.3%, 7.2% and 32 6.7%, respectively . However, the most important global effect of disaster is on the supply chains of companies sourcing their main components and raw materials from Japan. The disruptions and production shutdown in Japans manufacturing plants rippled through an interconnected complex network of supply chains and influenced many companies around 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 parts 33 from Japan that were already in the pipeline, limiting the immediate impact of the disruption there . Supply chain disruptions will also force the company to delay introduction of two new additions to the popular Toyota Prius 34 hybrid model that is built only in Japan . To cope with disruption, Toyota starts finding alternative sources through 35 close interactions with its suppliers . GM also had to shut down temporarily one production plant in Louisiana for lack of Japanese-made parts. As a 36 reaction to this disruption in its supply chain, GM started looking to slow down production of low-selling models . GM had a similar problem in its supply chain in 1996 when the stoppage of components from a brake supplier factory for 18 days led to interruptions in the production of 26 assembly plants and the estimated 37 reduction in quarterly earnings was around $0.9 billion . 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 to assemble its cars. In order to continue with production, the company used air transportation to ship some parts 38 from Asia, which increased the cost of every car by $300 to $600 . Similar supply issues may influence the normal operation of supply chain for other automakers, as Japan imports 39 about 2.5 million engines and 8.5 million transmissions to the U.S. every year . Another leading company that is likely to be affected by disaster is Apple . Apple suppliers, Mitsubishi Gas Chemical 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 June 41 quarter . To better manage the effects of Japan quake on its supply chain, Apple might be willing to employ the lessons st learned in a previous similar disaster, Taiwan earthquake in 1999. In 21 of September 1999, a big earthquake hit the Chi-Chi region in Taiwan. Consequently, power outages and damaged equipment halted production in several Taiwanese factories supplying PC components to numerous companies among them two main competitors in the market; Apple and Dell. However, the reaction of these two companies to this disruption in supply could not be more different. Apple that had announced the launch of its new products and received thousands of order- faced product backlogs due to component shortages and inability to alter product configurations; an abnormal situation 42, 43 that resulted in many canceled orders and consumer complaints . 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. The ability of Dell to steer customers to where Dell wants them by selling the available configurations increased its 44 third quarter earnings by 41% over the same period of previous year in spite of disaster in Taiwan . Undoubtedly, Apple is not the only computer electronics and IT company that will feel the effect of disaster in its global supply chain. Japan is the worlds largest supplier of silicon used to make semiconductor chipsat about 60 45 percent of the global total . If this supply is disrupted due to the logistical and infrastructure challenges, an impact in the business of many parts and products such as NAND flash memory, DRAM, microcontrollers and LCD panels is not beyond expectations. Of course, the global supply chain of many companies has several weeks of excess component inventory in the pipeline for semiconductor. Because of this, the shortages are not likely to appear 46 until the end of March or the start of April . Based on this, some companies like Nokia estimated that the events in Japan will not have a significant impact on the companys first quarter results. On the other hand, the current 47 shortages and their price impact are likely to remain until the third quarter . Some experts believe that this is just the beginning and as time goes by, we might be able to have a better picture of disaster damage to global supply chains around the world. We need more time to see how companies will figure out 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 world from which just a few are happening in major centers of trade and industry. However, those rare events in important areas help us to evaluate the vulnerability of our global supply chains to disruptions and our capabilities to cope with them. Easy to remember that less than one year ago, the Iceland volcano and following closure of European space had 48, 49 major impacts on the operation of supply chains for many companies like HP, BMW, Nissan, Samsung and LG . 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 a supply chain must be designed and managed in the uncertain business environment. The 90s trends in managing supply chains such as Lean Production, Global Outsourcing and Single Sourcing were superior and (cost-effective) options for Stable environments. But, to work in a complex turbulent business st environment of 21 century with volatile demand for customers, high level of competition, short product life cycles, 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 phenomenaloss of control and loss of 50 visibility . 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 degrees of freedom we have to manage abnormality. We must be aware that the global sourcing contributes to the structural complexity of our supply chains and a 52, 53 more complex supply chain is more prone to disruptions too . In addition, coupling global sourcing with lean production might be fatal strategic decision for a supply chain; because it leaves very little space for companies to handle abnormal situations in their supply chains. Additionally, as Perrow discusses in his Normal Accident
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Theory when our system is very complex (when there is low buffer in the system and when there is high level of 54 interactions in the system), the accident in the system is normal and unavoidable . Consequently, due to our global complex supply networks, abnormal event in one specific region in the world is not local anymore; its impacts 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 reevaluated after a massive disaster such as earthquake in Japan. Each company can evaluate the effects on its supply chain and comes with a list of lessons for its specific company; a list that hopefully helps us to think about what must be done before next big event in the supply chains. That big event might be a closure in Rotterdam or Singapore 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 only must we be ready to face known-known and known-unknown risks in our supply chains but also the list of unknown-unknown root causes that may affect our supply chain is developing very fast and every day. Probably, it is the good time to give Risk Management the credit it deserves in supply chains management; besides, a good moment to think of supply chains that are optimized both for costs and risks.

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10- M. Maisto, Effect of Japan Quake on Semiconductor Industry Still Unclear, retrieved 31 March 2011, <http://www.eweek.com/c/a/IT-Infrastructure/Affect-of-Japan-Quake-on-Semiconductor-Industry-Still-Unclear742426/>. 11- G. Jayakumar, UPDATE 1-NEC, Fujitsu to delay personnel changes - Nikkei, retrieved 31 March 2011, <http://www.reuters.com/article/2011/03/28/japanitvendors-idUSL3E7ES2WK20110328>. 12- ---, Notice Regarding Impact of Earthquake in the Tohoku Region of Japan, retrieved 31 March 2011, <http://www.fujitsu.com/global/news/notices/n20110314-01.html>. 13- B. Wassener and C. V. Nicholson, In Quakes Aftermath- Japanese Companies Try to Take Stock, retrieved 31 March 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, <http://e.nikkei.com/e/fr/tnks/Nni20110329D29JF371.htm>. 16- N. Davis, INSIGHT: Japan earthquake's impact on supply chains, retrieved 31 March 2011, <http://www.icis.com/Articles/2011/03/21/9445788/insight-japan-earthquakes-impact-on-supply-chains.html>. 17- ---, TABLE-Japan refinery operations status after quake, retrieved 31 March 2011, <http://af.reuters.com/article/energyOilNews/idAFL3E7EB2HO20110322>. 18- ---, Japan quake, tsunami could cost $309 bn, retrieved 31 March 2011, <http://www.inewsone.com/2011/03/23/japan-quake-tsunami-could-cost-309-bn/37730>. 19- B. Wassener and C. V. Nicholson, In Quakes Aftermath- Japanese Companies Try to Take Stock, retrieved 31 March 2011, <http://www.nytimes.com/2011/03/12/business/global/12yen.html?partner=rss&emc=rss>. 20- ---, Sony suspends production at plants in Japan, retrieved 31 March 2011, <http://www.procurementleaders.com/news/latestnews/1207-sony-suspends-production/>. 21- ibid. 22- ibid. 23- I. Reynolds, Sony says supply-chain woes to affect 5 more plants, retrieved 31 March 2011, <http://www.reuters.com/article/2011/03/22/us-sony-idUSTRE72L0KE20110322>. 24- C. Jasper, Japan's airports have fuel for just 10 days, retrieved 31 March 2011, <http://www.mb.com.ph/articles/310733/japans-airports-have-fuel-just-10-days-says-iata>. 25- ibid. 26- ibid. 27- ibid. 28- D. White, Buncefield: One Year Later, retrieved 31 March 2011, <http://www.fireworld.com/ifw_articles/hardingham.php>.

29- B. Cahiles-Magkilat, Japan earthquake disrupts electronics supply chain, retrieved 31 March 2011, <http://www.mb.com.ph/articles/309819/japan-quake-disrupts-electronics-supply-chain-says-seipi>. 30- D. Ford, Japanese Earthquake to Impact Component Supply and Pricing, retrieved 31 March 2011, <http://www.isuppli.com/Semiconductor-Value-Chain/News/Pages/Japanese-Earthquake-to-Impact-ComponentSupply-and-Pricing.aspx>. 31- J. Oram, How Japan Earthquake Affects the Global Memory Supply Chain, retrieved 31 March 2011, <http://www.brightsideofnews.com/news/2011/3/14/how-japan-earthquake-affects-the-global-memory-supplychain.aspx>. 32- ---, Libyan war, Japanese earthquake; Impact over the auto industry!, retrieved 31 March 2011, <http://www.inautonews.com/libya-war-japan-earthquake-impact-over-the-auto-industry>. 33- J. Crawley, Toyota to slow some North American production, retrieved 31 March 2011, <http://www.reuters.com/article/2011/03/24/us-usa-toyota-idUSTRE72M8QS20110324>. 34- B. Wassener and C. V. Nicholson, In Quakes Aftermath- Japanese Companies Try to Take Stock, retrieved 31 March 2011, <http://www.nytimes.com/2011/03/12/business/global/12yen.html?partner=rss&emc=rss>. 35- J. Crawley, Toyota to slow some North American production, retrieved 31 March 2011, <http://www.reuters.com/article/2011/03/24/us-usa-toyota-idUSTRE72M8QS20110324>. 36- ibid. 37- N. Radjou, Adapting to supply network change, Report, Forrester Research Inc., Cambridge, MA, 2002. 38- Y. Sheffi, the Resilient EnterpriseOvercoming Vulnerability for Competitive Advantage. Cambridge, MA: MIT Press, 2005. 39- E. Fedewa, IHS- Japan Crisis: Transmission and Engine Losses, retrieved 31 March 2011, <http://www.oesa.org/Action-Alerts/IHS-Japan-Crisis-Engine-and-Transmission-Output-Losses.pdf>. 40- D. Frommer, Apple Supply Chain Temporarily Affected By But "Demand Stronger Than Ever", retrieved 31 March 2011, <http://www.businessinsider.com/gene-munster-apple-supply-demand-2011-3>. 41- ibid. 42- Y. Sheffi, the Resilient EnterpriseOvercoming Vulnerability for Competitive Advantage. Cambridge, MA: MIT Press, 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, <http://www.isuppli.com/Semiconductor-Value-Chain/News/Pages/Japanese-Earthquake-to-Impact-ComponentSupply-and-Pricing.aspx>. 46- ibid.

47- ibid. 48- ---, Marsh- Iceland Volcano Fallout Could Impact supply Chain Resilience, retrieved 31 March 2011, <http://global.marsh.com/news/press/pr2010April22.php>. 49- ---, Ash hits Nissan and BMW factories, retrieved 31 March 2011, <http://news.bbc.co.uk/2/hi/business/8631676.stm >. 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-run stock price performance and equity risk of the firm, Production and Operations Management 14 (1), pp. 3552, 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. 388396, 2004. 53- C. Perrow, Normal Accidents, Basic Books, New York (1984). 54- ibid.