Japan and Ecuador Earthquakes: Supply Chain Lessons from Past Disasters

The recent earthquakes in Japan and Ecuador are a sad reminder of how deadly natural disasters can be. As of this morning, 41 people are confirmed dead in Kumamoto prefecture, the epicenter of Japan’s earthquakes, and 272 people have died in Ecuador, with thousands more injured and displaced from their homes. Our thoughts and prayers are with the people of Japan and Ecuador, especially all of the victims and their families, as they deal with the aftermath of these tragic events.

These earthquakes are also a reminder of how natural disasters can disrupt supply chains. As reported by Jun Hungo in the Wall Street Journal:

Toyota said it would gradually halt vehicle production this week at most of its plants in Japan because of a shortage of components following the Kumamoto quakes. A production halt will continue at its car plant in Fukuoka prefecture where Lexus vehicles are made. Some major plants in central Japan including the Tsutsumi plant, where Toyota makes the Prius, will stop production from Tuesday to Saturday, the company said.

Other auto makers including Honda Motor Co. and Nissan Motor Co. have also halted operations at factories in the area following the earthquakes.

Sony Corp. was assessing damage at a plant in Kumamoto where image sensors for smartphones including Apple Inc.’s iPhones are manufactured. “The plant doesn’t look like it can restart in a day or two,” [a company spokesman] said.

As I wrote following the earthquake and tsunami that devastated Japan in March 2011, the reality is that there is relatively little companies can do right now to minimize the impact of these disruptions. Either you have been preparing for this type of disruption all along, taking the lessons learned from past disasters and building a resilient enterprise, or you have taken your chances and haven’t prepared effectively, believing that lightning won’t strike twice. The least impacted companies will be those that have been (among other things)…

  • Sourcing critical parts from multiple suppliers, manufactured in multiple factories, located in multiple geographic regions;
  • Using widely-available, standard components instead of proprietary, custom-built parts;
  • Keeping excess manufacturing capacity in their factories;
  • Designing and equipping their factories to build a wide portfolio of products;
  • Implementing redundant IT systems and data centers;
  • Using multiple modes of transportation, and working with multiple logistics partners.

Over the past few years, I’ve written extensively about the growing importance of supply chain risk management and supply chain mapping, including the following:

Several years ago, Bindiya Vakil, founder of Resilinc and a supply chain risk management expert, gave a presentation at a CSCMP New England Roundtable event where she asked the following question: If an earthquake or other major event disrupts your supply chain, can you complete an email like this within four hours of the event?

At 9:05 am today, an earthquake of magnitude 7.0 struck Vietnam. N suppliers have manufacturing sites in a X mile radius of the epicenter. Within X hours of the event, we contacted all of these suppliers and determined that X supplier has shop floor damage. This will take N weeks to repair and clean up, and an additional N weeks to ramp and clear backlog. N single sourced parts with revenue impact $X-$YM each are manufactured at this facility. They are used in critical product lines Alpha and Gamma.

We have N weeks of component supply on hand and have secured additional N weeks of inventory from the broker market. The supplier has an alternate facility in X which can build this part. A 4 person team will deploy tomorrow to the alternate facility to support the supplier with an initial build. The alternate site should be up within N weeks. Communications with the supplier are streamlined and updates are posted every N hours.

At this time, we have no reason to believe that our manufacturing lines will be shut down due to this event.

The ability to compose such an email implies that you have mapped your supply chain, that you have timely, accurate, and complete visibility to what’s happening in your supply chain, and that you communicate and collaborate effectively with your suppliers and trading partners  — which, in my book, are all fundamental attributes of supply chain excellence.

Finally, it’s important to note that natural disasters are not the only things that can disrupt supply chains. Earlier this month, for example, Tesla reported that its “Q1 delivery count was impacted by severe Model X supplier parts shortages in January and February that lasted much longer than initially expected.” What caused these parts shortages? According to the company:

The root causes of the parts shortages were: Tesla’s hubris in adding far too much new technology to the Model X in version 1, insufficient supplier capability validation, and Tesla not having broad enough internal capability to manufacture the parts in-house. The parts in question were only half a dozen out of more than 8,000 unique parts, nonetheless missing even one part means a car cannot be delivered. Tesla is addressing all three root causes to ensure that these mistakes are not repeated with the Model 3 launch.

Hubris, insufficient supplier capability validation, and not having enough in-house capabilities to produce parts — these things are not as attention grabbing and destructive as a major earthquake, but from a supply chain perspective, they can inflict their fair share of damage too.