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STEEP: Japanese Earthquake Sends Tremors of Change into Supply Chains

This is Part 3 of the content series STEEP: Five Drivers of Change in Supply Chain. The series analyzes Social, Technological, Environmental, Economic and Political issues in the supply chain industry to gain a deeper insight. To see an overview of the series, click here.

There are drivers of change that fall outside the realm of even the best supply chain manager’s ability to prepare and control how a company reacts. Among them, environmental factors and natural disasters often cause the most physical damage and present logistical questions across all levels of the supply chain.

While natural disasters come in many forms, few are less predictable than earthquakes. The 2011 Tohoku earthquake and the tsunami that followed killed more than 19,000 people in Japan and led to a contamination crisis around Fukushima’s nuclear power plant. It was one of the most devastating disasters of the last 50 years and brought about a shift in Japan’s approach to the supply chain.

The Damage

The earthquake registered a magnitude 9.0, causing immense damage to roads, factories, ports, stockyards and rail lines. The country faced significant challenges in taking toll of the human loss, and notably, the destruction that caused radiation leaks surrounding the Fukushima plant.

Among the challenges was getting Japan’s supply chain back in order. While government officials had other priorities, the nation’s business sector had cause for concern, as each day Japan’s supply chain sat idle it cost the country billions of dollars in economic activity.

The epicenter of the 2011 earthquake was located in the northeast portion of the country, a good distance from much of Japan’s manufacturing core and the hustle and bustle of Tokyo. However, some of the nation’s busiest ports and several factories were damaged. Much of the country experienced rolling blackouts and transportation disruptions, which caused major issues at factories and corporate headquarters regardless of their proximity to the quake’s epicenter.

Japan’s status as the world’s third-largest economy wasn’t under threat, even though that status is partially owed to the billions of dollars generated by the computer, electronics and automotive industries. With factories offline, supply lines broken and ports in disarray, the economic engine of the country was, to say the least, not firing on all cylinders.

According to Reuters, one-fifth of the world’s electronics at the time were manufactured in Japan, with the country being the largest supplier of silicon wafers, necessary to the construction of semiconductors used in computers and cell phones. Major companies, from Toyota to Sony, were forced to suspend production for months following the disaster due to damage at factories.

Japanese companies were somewhat prepared, having outsourced the production of certain vital parts to South Korea, China, and Taiwan. But even these suppliers were affected, many of them relying on Japan for specific materials necessary to complete production.

For example, Japan is a major exporter of steel used in shipbuilding and automotive manufacturing and provides many of the electronic components found in cars from all around the world. With plants offline, these industries all had to wait for Japan to get back to doing business as usual. In some cases, lacking a single component could mean shutting down an entire factory. In the United States, a truck factory belonging to General Motors closed temporarily due to a lack of Japanese-made parts, according to an article from The New York Times.

In the southern portion of the country, rolling blackouts delayed production significantly, increasing the cost of business interruption and recovery. Supply shortages followed, leading companies to purchase replacements on the open market at a higher cost. These replacement parts often caused engineers to redesign existing products to accommodate the new parts, delaying product launches and stifling further innovation.

Auto manufacturer Toyota suffered some critical blows in particular, leading to questions about the famously efficient Japanese approach known as “just-in-time” supply chain, which cuts costs by reducing the amount of materials a company holds in stock. While that has some proven significant benefits, natural disasters can cause major problems with a firm’s ability to do business effectively if there is a shortage of backup supply.

The damage went further than manufacturing as all elements of the supply chain suffered. Two freight trains derailed, and some roadways in the northeastern part of Japan were severely damaged, meaning companies in that part of the country had to shift their domestic shipping operations into other areas as best they could.

Japan’s ports fared even worse. The engine that moved as much as 7% of the country’s industrial output suffered an immense amount of damage, causing some to shut down operations for months. Ships were washed ashore courtesy of the tsunami and container yards were upended into a jumbled mass of metal boxes. Portions of the country’s largest port, Sendai, were almost destroyed entirely, and five other ports were severely affected.

As the nation rebuilt, one thing became clear; Japan had a lot of work to do to prepare for mega quakes like the one on March 11, 2011 possibly striking again. Factories needed to be reinforced, roads rebuilt, contingency plans improved and supply lines tracked more accurately.

The Response

Following the Tohoku quake, Japanese companies began to evaluate their supply chains and identify weaknesses in their manufacturing processes. They spent time reinforcing their buildings and adopted new technology to track their supplies better. Toyota, for example, began using a database called Rescue to store information about thousands of parts at 650,000 supplier sites around the world. This helps the company cope with bottlenecks should one supplier be taken offline.

In the case of Renesas Electronics Corporation, the earthquake created chaos. The largest supplier of microchips that control major automotive functions such as fuel injection and airbags became a major sticking point in the supply chain as it went offline for months.

In response, the company developed an emergency task force that would move swiftly to put countermeasures in place in case disaster struck again. Renesas also worked to integrate its factories to move production from one plant to another if needed. In the 2011 earthquake, the factory’s cleanroom, a contaminant-free environment, was heavily damaged, with employees saying they could “see the sky from inside the room” when the quake was over. The entire factory, and in particular the cleanroom, was reinforced when it was rebuilt.

When two earthquakes struck again in 2016 in the city of Kumamoto, where Renesas has another factory, its reaction was much improved due to the measures the company had taken to improve its disaster preparedness in the previous five years.

The initiatives included: maintaining a 4-12 week supply of chips, retrofitting factories so they are more earthquake resistant and dual sourcing certain products so that backup production can be done at a second facility. This has resulted in reduced impact on overall production for Renesas and in turn, its partners.

Concerning damage to rail lines, the loss of life was muted in 2011 thanks to the rail industry installing seismometers that trigger the emergency brakes of trains following the 1995 and 2004 quakes that rocked Japan. But those systems didn’t keep the rail lines themselves from sustaining damage, particularly traditional rail lines where freight trains operate.

There were more than 2,590 incidents of displaced track following the 2011 quake, causing reduced or suspended operations on most of the country’s 7,512 kilometers worth of tracks. In Tohoku, more than 325 kilometers of track were washed away by the tsunami. Engineers were able to get bullet trains back on track just 49 days after the quake, but repairing traditional rail lines is still being tackled today.

As for Japan’s ports, the Tohoku coast saw an injection of cash that helped rebuild its roads and the heavily damaged ports. In response to the tsunami, the government sank nearly 1 trillion yen into building a 400-kilometer-long seawall along the coast. Zoning restrictions were also put in place to prevent development in areas that will be hit the hardest should another tsunami like the Tohoku disaster occur.

While Japan’s economy is back on track, the recovery from the 2011 quake is ongoing. When the Kumamoto quakes hit, many of the countermeasures and initiatives put in place were validated. Though the quakes were nowhere near the severity of Tohoku, they showed encouraging signs. Supply chain disruption was minimal, lasting days and weeks rather than months.

What Does This Mean for Japan?

Of course, there is still more to learn. The Japanese role in the supply chain is vital, so maintaining stores of supply and diversifying supply sources is crucial to keeping the productivity of this economic powerhouse rolling along. Doing so is the only hope the country has of answering the questions posed by nations that rely on it.

Numerous factors threaten Japan’s ability to maintain its place at the top of the supply chain when it comes to manufacturing the niche market goods it specializes in, from rising wages throughout Asia and much of the developing world to fuel costs and the growing pressure on Western companies to begin near-sourcing.

Japan’s fate lies in its reaction to these catastrophic events and its ability to demonstrate its reliability and positive relationship with the rest of the world. As many scholars have noted, history has given the rest of the world reason to watch closely when Japan copes with disaster. The 1923 Kanto earthquake sparked a nationalist reaction in Japan that led to increased militarization and the war-provoking stance that came forth in the next few decades.

The 1995 Kobe earthquake, sometimes referred to as the Great Hanshin earthquake, caused Japan to look at its disaster preparedness in a new way. According to media sociologist Takeda Toru, it also caused a period of inward reflection, a drastic switch from the outward consumption that drove the Japanese economy in the years prior. The economic effect was significant, and though the Kobe quake did not approach the severity of the Kanto or Tohoku disasters, the damage it caused was a wakeup call that Japan’s city planners, government officials and major businesses have been answering ever since.

The most recent earthquakes in Kumamoto show encouraging signs for Japan’s ability to cope with the forces that threaten its way of life, but getting here has come at a great cost to the Land of the Rising Sun and the businesses that call its shores home.

 

 

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