Quake Effects: Is Your Supply Chain Safe?

by Cesar Bacani, 28 March 2011

When news of the earthquake and tsunami in Japan reached Gary Lynch, his first thought would surely have been with the victims of the tragedy. After that, he probably thought: More late nights, again!

Lynch is Head of Supply Chain Risk Management at Marsh Risk Consulting, and it is his job to advise corporate clients about supply chain issues after a disaster – or preferably before it happens.

He has been extremely busy. Over the past year, major earthquakes hit New Zealand, Chile, Haiti and Japan. Australia suffered from massive flooding while Iceland reeled from a volcanic eruption. Pirates hijacked supertankers off the coast of Africa and the Gulf of Mexico was sullied by a three-month-long oil spill.

But it is the 9.0-magnitude quake in Japan and the associated tsunami and ongoing nuclear accident that probably have the most serious impact on global business. That’s because the world is “more integrated, more dependent on external parties for the most part, much leaner after the financial fallout,” says Lynch.

“The execution of just-in-time [manufacturing] ten to fifteen years compared to now is much more pervasive,” he adds. “All this has had a significant impact this time around.”

Broken Chains

In a new report that looks at the impact of the disaster on a range of consumer and industrial corporate sectors outside Japan, Moody’s Investor Service singles out automotive and technology as among the hardest hit sectors.

Indeed, Toyota and Honda in Japan were still shuttered two weeks after the quake, because some of their suppliers are located in the northeast, which suffered the brunt of the earthquake and the tsunami. Honda, which has 110 suppliers in the devastated region, indicated that a tenth of those suppliers are meeting difficulties in restarting operations.

“Ascertaining conditions over the entire supply chain from the materials stage onward and returning to normal operations or switching to alternative parts is difficult,” wrote JP Morgan analyst Kohei Takahashi in a report, suggesting that the car plants may “remain in disarray” for a longer period than expected.

By the end of March, Bloomberg estimates, 600,000 vehicles worldwide may fail to roll out of assembly lines because of problems at Japan's auto parts makers and other suppliers, including the maker of a paint pigment. Michael Robinet of US research organisation IHS Automotive told the business information provider that some 320,000 vehicles have already been lost as of March 24.

“The next surge of shutdowns comes when the pipeline of parts that were already built dries up,” Robinet told Bloomberg. “The rate of lost production will accelerate once North American plants join in.”

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