Japanese crisis: When major supply chains break

MIT Sloan Sr. Lecturer Don Rosenfield

Measured against the deaths of thousands and the threat of nuclear meltdown, economic damage to supply chains seems a small matter. But it is nonetheless true that the earthquake and tsunami that hit Japan last week will affect important global industries. When major supply chains break, businesses and consumers around the world feel the consequences.

Japan is a world leader in many industries, from computers to steel to machine tools to automobiles. In the region hit by the quake and tsunami, factories and other businesses have been shut down and may not reopen for weeks or months. Interruption of energy supplies has forced plants elsewhere in the country to close or limit operations.

In the 1980s and 1990s, manufacturers around the world retooled their supply chains. They sliced inventories and trimmed lead times. With lean and agile supply chains, manufacturers became more efficient and competitive, but they also became more vulnerable to catastrophic events like what happened  Japan. With so little slack built into systems, disruptions of any duration produce shortages at the end of the supply chain.

Some manufacturers, including chip makers, may be able to find alternate sources of production. Texas Instruments, which saw a major factory badly damaged by the disaster, announced this week that it expected to shift 60 percent of the lost production to other facilities. For other manufacturers, though, options will be few. Automakers, in particular, will have difficulty shifting production elsewhere. Toyota’s Prius hybrid, much in demand now because of soaring gas prices, is made only in Japan.

There is no question that supply chains within Japan are seriously disrupted already. A colleague who is near Tokyo emailed me this week, “Our real problems are just starting. We cannot get gas for auto, oil for heating, and battery for radio. The shortage of food such as bread and vegetables has become apparent. Trains and buses run about half of normal. Scheduled blackouts of electricity started two days ago in Tokyo and surrounding areas.”

As the rest of the world struggles to comprehend the horrific events still unfolding in Japan, we also need to understand that in the days to come the disaster will produce many smaller ripples that will wash onto all of our shores.

Don Rosenfield, PhD, is the director of the MIT Leaders for Global Operations program and a senior lecturer at MIT Sloan School of Management

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