By Ravi Kumar
In the 1970s and 1980s, the Japanese devised an incredible system of manufacturing that changed the world. Called “Lean Operations,” the organization of manufacturing work was cleverly managed and controlled with a rallying call: eliminate waste.
And one of the key factors in manufacturing, inventory of parts and materials, was considered a waste and engineers/workers were challenged to reduce these to as low a level as possible and obtain these part and materials “just-in-time” for their use.
At the same time in the U.S., inventory was seen as an asset, from an accounting point of view, and was held “just-in-case” something went wrong.
Over the last 30 years, business school professors all over the world have been teaching undergraduates, MBAs and PhDs about lean operations and the efficiency of just-in-time systems.
Over the last twenty years, large-scale globalization has occurred of manufacturing factories and suppliers, aided by advances in communications technology, including high speed computing, enterprise resources planning systems and global networks.
If you consider the iPhone “made” by U.S.-based Apple, more than 75 percent of the parts come from manufacturers in Japan, Germany, South Korea, Taiwan and China, and less than 10 percent from the U.S.; and of course, it is assembled in China and sold all over the world. This is what we call global supply/value chains
Now what happens to such global supply/value chains during an earthquake or a tsunami?
The answer is: it depends. When the devastating earthquake in Haiti occurred in 2010, with a magnitude of 7 on the Richter scale, around 250,000 people died, infrastructure was badly damaged and countless people rendered homeless; but from a global supply/value chain perspective, not much economic damage ensued.
On the other hand, the 6.4 magnitude 2010 earthquake in Kaohsiung Taiwan reported no deaths or major damage but the impact on factories owned by Taiwan Semiconductor Manufacturing Co (TSMC), Chi Mei Optoelectronics Co and Advanced Semiconductor Engineering Inc created major global supply/value chain economic impact, especially for U.S. companies.
The 7.3 magnitude earthquake in Jiji Taiwan in 1999 saw a major drop in stock prices of US technology companies listed on the NASDAQ exchange, due to their just-in-time dependence on suppliers from manufacturers in Taiwan.
The 2004 tsunami in the Pacific completely damaged numerous towns in countries like Indonesia, Thailand, India, Sri Lanka and Maldives but did little economic damage to global supply/value chains; on the other hand, the recent Japanese tsunami has been devastating to global automotive and electronic manufacturing industries.
Japan-based companies, like Hitachi and Sony, produce a large portion of the silicon wafers and adhesives that are used in the LCD panel assembly process.
These are already in short supply and global firms are scrambling to stockpile inventories till the Japanese factories are back producing normally.
The new iPhone5, which is scheduled to be released later this year, may be affected due to the disruption of production at Toshiba’s semiconductor manufacturing foundry that make the NAND flash memories. iPad 2 production could also be disrupted with problems in the supply of their lithium-ion battery packs, made in Japan.
The global automotive industry has also been hit hard by the Japanese natural disaster. Analysts are predicting that half of Japanese automotive production and one-third of global production will grind to a halt by May.
Toyota closed 18 of its assembly plants, due to the supply interruption and shortage of parts, caused by their single source and just-in-time policies. Nissan may have to take the unprecedented step of importing engines from its US division to complete its cars in Japan.
With production affected at the Hitachi factory that produces sophisticated airflow sensors, several Peugeot factories producing Citroen and Peugeot models as well as GM Opel division’s plants producing the Corsa model have been shuttered.
With radiation issues and rolling power outages, the Japanese disaster is expected to have a continuing effect on the world economy. Not only are the Japanese people and their economy affected, their management teaching has made the world at large vulnerable also.
While global manufacturing and retailing made large efficiency gains with the adoption of lean operations principles, what these natural disasters have taught us is to look out for the risks involved in adopting such management tools.
At the same time, one U.S. company that does well in times of disasters such as these is Wal-Mart—they had marshaled all their resources from its headquarters in Bentonville, Arkansas to its regional headquarters in Hong Kong to hand out food and water from their Seiyu store parking lots in the Sendai/Fukushima areas just twelve hours after the earthquake, just-in-time to help and support distressed Japanese families.