Sendai's Supply Chain Stress Test

April 01, 2011


Two weeks after Japan’s catastrophic earthquake and tsunami, the task of measuring the grim consequences has only just begun. Even now, the bleak images of physical devastation in the coastal towns in north east Japan defy imagination. Clearly it is going to take many patient years – and hundreds of billions of dollars – to bring local peoples’ lives back to any kind of normality.

Equally appalling, the scale of the nuclear disaster seems to grow by the day. We are still far from guessing what the ultimate consequences will be – both inside Japan and around the world.

But one area of paranoid alarm can be more easily dismissed: the panic over disruption to global supply chains. Thousands of column inches, and hours of television coverage, have been spent examining the economic damage that will arise around the world as a result of supply chain disruption. Many have raised questions about whether the practice of distributing manufacturing around the world, and building complex supply chains to link the manufacturing together, makes business sense.

All of these questions can be answered simply: the supply chain disruption will be short-lived; no companies of note will suffer any noticeable damage; and businesses will continue to build and rely on the leanest possible supply chains. Many would be sensible to take this opportunity to review their Business Continuity Plans, and to re-test the resilience built into their supply chains, but speculation and angst about more profound damage to globally distributed manufacturing practices will remain the preserve of hyperventilating media.

There are several reasons for being so certain about this:

  • First, the disruption outside the immediate vicinity of the disaster zone in north east Japan has actually been limited. A number of car makers, and manufacturers of components for a range of IT products and smartphones, have been badly disrupted, and are likely to remain so for weeks and perhaps months, but none of these have such a controlling share of supply to global markets to inflict any noticeable consumer pain.

  • Even for companies facing severe disruption among existing suppliers – like Nokia, which sources 12% of its components in Japan – or car companies like Toyota and Nissan which have major plants close to the disaster zone, it has quickly become clear that alternative sources of supply of necessary parts or components are in the process of being found.

  • Even for companies that face disruption for many months, the consumer pain will be small. Can anyone really put their hand on their heart and say that the world will be a poorer place if supplies of new iPad 2s or Nokia smart phones are disrupted for four or five months. Will a US motorist really suffer hardship if he is forced to replace his car every 12 months instead of every 9 months? Will a parent really complain if the latest Sony Play Station consols disappear from the shelves for a few months. I have been searching hard to discover any critically important product facing disruption, and have found absolutely none. The disaster may have stopped some of us from getting our hands on some things that we want, but it has not stopped us getting our hands on anything we need. While this remains true, I am not going to waste sleep worrying about the plight of global supply chains.

In truth, rather than expose weakness based on dispersal of supply chains across many different countries, the disaster in Japan has demonstrated the opposite: by sourcing component manufacture across many different countries, companies have created a resilience that would not have been possible if they had based everything in one single place. There is a vulnerability that results from linking together manufacturers in a supply chain spread over many countries, but there is resilience too. The smart company will be using this dreadful dislocation as an opportunity to check just how robust their supply chains are.

Some media have speculated that the disruption will persuade some companies to shorten their supply chains – with European companies relocating manufacturing away from China into Turkey, for example, and US companies recoiling into Mexico. While I am sure they will succeed in finding the occasional anecdote to support this thesis, it seems to me to lack any sense.

For example, average manufacturing wages in Mexico are at least 50% higher than those in China – and their total manufacturing workforce totals around 7 million – compared with perhaps 10 times that number in China. Other countries talked of as potential beneficiaries of factory migration away from China – like Cambodia, Indonesia or Sri Lanka – have similarly modest labour pools – far too small to absorb any meaningful transfer of factories away from China’s massive manufacturing economy. And what global manufacturer can possibly ignore – or be unaware of – the opportunities emerging as China’s vast consumer economy continues to grow at a pace that is undreamable anywhere else in the world?

No, the reality is that globally distributed manufacturing – and the long and complex supply chains that make it possible – is alive and well and will emerge from this terrible crisis having learned valuable lessons that will improve resilience, and perhaps make the supply chains leaner still. If the disruption enables us to think a little more carefully about what we need, rather than what we want – and perhaps weans us a little away from the hyper-consumptive lifestyles that we have developed over the past few decades – then perhaps a little bit of good will have emerged out of the horrific events of the past two weeks.

 

*The translated Chinese version was published in Ming Pao on April 1, 2011.

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