Korean firms should learn from Japan’s earthquake

By Lee Seong-jin

A powerful earthquake and a tsunami hit Japan’s Tohoku area on March 11, 2011. In addition to a high death toll and devastation of an expanded area, tremendous damage was done to the Japanese economy. Industrial centers of Tohoku area were destroyed and power supply was strictly controlled because nuclear power plants halted regular operations.

Global leading auto makers in Japan which boasted of finely-tuned manufacturing and delicately-balanced just-in-time delivery system were particularly vulnerable to the natural disaster.

When operating normally, it is highly productive. But a single disruption anywhere along the value chain can tie up the whole system. Toyota and Nissan stopped a majority of their domestic productions lines because several tier 3 parts manufacturers were affected by the earthquake.

Both companies had a well-designed information and risk management system down to tier 1 suppliers, but realized that even a problem at a single lower-tier supplier can put the entire system on hold.

Japanese auto makers diagnosed the diamond bottle-neck problem and started overhauling their risk management system. They reviewed their risk management manuals and created or strengthened dedicated risk management offices.

Enterprise risks can be categorized into index, scenario, and disaster types. Index type risks take place routinely and can be managed by monitoring key risk indices. Scenario-type risks are so complex and uncertain that sophisticated scenario analysis is required to estimate how a risk would unfold when it happens. Disaster-type risks are often less controllable and the focus is more on taking systematic actions based on pre-developed manuals and achieving quick recovery.

Korean companies are exposed to various forms of risks as well. There are index risks such as global macroeconomic conditions and shortage of key natural resources. We also face serious scenario risks such as North Korea and anti-business sentiment.

Although the Korean peninsula has been relatively safe from natural disasters, recent climate change presents significant potentials for catastrophes in Korea. In summary, Korean companies should consider developing comprehensive enterprise risk management systems.

There is an old proverb that says “shut the stable door after the horses have bolted.” The most effective way to manage risks is to incorporate them in strategic planning and to treat enterprise risk management as an integral part of strategy and operations. This is how risk-intelligent enterprises deal with various risks proactively and systematically.