Japan Disasters Severely Disruptive to Supply Chains

Due to the recent disasters in Japan, companies like Toyota, Honda, Chrysler, Sony, Toshiba, and H&M were forced to suspend operations in some of their plants in Japan and other countries. Chrysler cut overtime at plants in Canada and Mexico just to conserve parts. As the world’s third-largest economy, Japan’s suppliers are vital to many supply chains, so the disaster’s impact is felt by industries around the world.

There’s no denying that the disaster in Japan is severe but from a supply chain standpoint, just how severe is it?

This is exactly the question that a chief economist in the Division of International Affairs for the U.S. Treasury was trying to answer when he reached out to Smeal assistant professor, Christopher Craighead.

Craighead has been conducting research on supply chain disruptions and risk for more than eight years now. He has examined various aspects of managing risk/disruptions (e.g., assessment, mitigation) in a variety of supply chains (e.g., automotive, aerospace) and in light of various supply chain decisions (e.g., supply chain design, supplier selection, supply chain project investments). Most recently, he is focusing on how to build supply chain resilience to catastrophic disruptions such as natural disasters.

Much of Craighead’s conversation with the Treasury economist centered on the potential severity of the disruptions realized by the tragedies in Japan and what makes one disruption more severe than another. The conversation reflected back upon previous research conducted by Craighead and his co-authors, Jennifer Blackhurst of Iowa State University, Johnny Rungtusanatham of the University of Minnesota, and Robert Handfield of North Carolina State University.

In their 2007 research paper published in Decision Sciences, they identified three key characteristics of supply chain design that impact the severity of a disruption: density, complexity and node criticality.

Supply chain density refers to the geographical spacing of nodes, or suppliers, within a supply chain. A dense supply chain is one with nodes clustered closely together.

A complex supply chain has many nodes and accompanying flows. Companies’ global-sourcing initiatives have made supply chains more complex.

Node criticality describes the importance of a node within the supply chain. A few characteristics of critical nodes are access to scarce resources and heavy product flow, like a seaport. The more unique capabilities a node has, the more critical it is.

“If we look at Japan, we see that all three of these characteristics are present,” says Craighead. “There are a lot of sources in supply that are in close proximity. They have unique suppliers that are critical to such industries as electronics and automotive and the fact that they are in a global supply chain means more complexity.”

How companies bounce back from these disruptions depends on how resilient their supply chains are. Craighead says that companies should have flexible processes in place and redundancy in the supply chain to protect themselves from the dangers of node criticality.

“If a company put mechanisms, contingency plans and processes in place and identified alternate sources of supply prior to the disasters, then they may bounce back more quickly,” Craighead says.

Unfortunately, he notes that the problems in Japan are propagating. What began as one event has snowballed into electrical issues, radiation exposure, and gas shortages, etc. all of which broaden its impact. Further, disruptions also propagate and can have far reaching effects. Because of this cascading effect, suppliers who aren’t directly connected to this event can experience severe repercussions due to the interconnectedness of global supply chains.

“That’s why I think the U.S. Treasury is looking at the macroeconomic impact of this tragedy,” adds Craighead. “It’s not a matter of if it’s going to impact our economy, it’s a matter of to what extent.”