As the situation in Japan becomes clearer, some companies are beginning to reassess the future of their supply chains. The devastation in Japan, as we all know, was enormous. Current estimates are that losses will approach a quarter of a trillion dollars. Supply chain analyst Bob Ferrari has posted three blogs focused on the near-term impact of the double blow resulting from the earthquake and the tsunami on supply chains. In the first of his posts, Ferrari notes that supply chains could be affected in many ways [“Devastating Earthquake Hits Japan: Global Supply Chains Will Be Impacted,” Supply Chain Matters, 11 March 2011]. First, of course, some goods and services originating in Japan will undoubtedly be seriously disrupted. Disruptions of supply chain flows into Japan could also be disrupted as massive amounts of relief supplies vie for available transportation space. In that initial post, Ferrari wrote:

“There are numerous reports concerning supply chain impacts:

• “Cellular phone networks are literally overwhelmed with traffic, hindering service
• “Massive fires are reported in over 80 locations which include petrochemical, refinery and utility plants.
• “Air and surface transportation has been disrupted. There are reports that Sensei airport is underwater, and Tokyo’s Narita airport had suspended all flights. U.S. military airbases were allowing airlines to utilize their runways for landing purposes. High speed rail, commuter and subway lines across all northern regions were shutdown due to safety concerns.
• “Japan’s governmental agencies currently have special concerns around Nuclear power plants that have been impacted by the quake, with reports that at least one plant has had its cooling system fail.
• “There are reports that Sony halted and evacuated 6 factories, Toyota has closed 3 factories, while Nissan has closed 4 factories. Other firms such as Panasonic are still assessing impacts. We located two articles, one from Bloomberg News, the other from the New York Times that provides initial business and supply chain impacts.”

Ferrari went on to note that “there are few global countries more well prepared than Japan … to deal with the effects of a massive earthquake” and, fortunately for the country, “the northern region impacted, while certainly populated with industry, is not where the highest concentration of industrial activity lies in Japan.” He concluded, “The effects or vulnerabilities to today’s very lean supply chain and our global community is about to be once again tested.” As the days have unfolded and the waters receded, the picture on the ground has become increasingly clear. The Australian Broadcasting Corporation (ABC) provided some interactive “aerial photos taken over Japan [that reveal] the scale of devastation across dozens of suburbs and tens of thousands of homes and businesses.” The photos can be accessed by clicking this link. They really drive home the devastation caused by the tsunami.

In his second post on the Japanese disaster, Ferrari suggested that “industries that could be impacted are high tech and electronics, automotive, aerospace and specialty instruments. There could also be some near-term agricultural commodity impacts since the impacted area was a major agricultural area for rice production.” [“Japan’s Devastating Earthquake: Supply Chain Matters Advisory Two,” Supply Chain Matters, 12 March 2011] We know from recent reports that radiation leaking from the stricken Fukushima Daiichi nuclear plant has, in fact, started to impact the food chain [“Radiation in Food Rises,” by Megumi Fujikawa and Juro Osawa, Wall Street Journal, 21 March 2011, and “Japan extends ban on contaminated food,” by Jonathan Soble, Financial Times, 21 March 2011].

There has also been some good news, however, such as the fact that Nissan Motor Co. announced that it “will start parts production and vehicle assembly operations this week in Japan [“Nissan to Resume Production in Japan,” by Yoshio Takahashi, Wall Street Journal, 21 March 2011]. Honda and Toyota are also planning to ramp up production. In the electronics sector, “the Sony Corporation, Japan’s largest exporter of consumer electronics, said Sunday that it was preparing in days to reopen a plant that makes rechargeable batteries in Northern Japan.” [“Japan Factories Take Steps to Resume Production,” by Nick Bunkley and David Kocieniewski, New York Times, 21 March 2011] Ferrari concluded his second post this way:

“The coming days and weeks are going to be intense for supply management professionals. There will be a need for continuous assessments and communications with key suppliers and partners. It may take time to gain a full assessment of the situation at the source, so take the time to establish a strong communication link, and be sensitive to the fact that this tragedy effects humans as well as businesses. Now is not the time to be issuing impersonal requests for information or key performance indicators. This is a time for reaching out, assessment, and preparing all forms of contingency planning.”

Ferrari begins his third update with this assessment: “The two most impacted industries initially appear to be automotive and high tech/consumer electronics, with some added concern for aerospace component suppliers. While supply chains currently have some buffer inventories to get through these next couple weeks, we believe it is still uncertain to ascertain any specific issues. Initial signs however are pointing to the potential for key component part shortages and/or price inflation for lower-tiered value-chain items.” [“Japan’s Devastating Earthquake: Supply Chain Matters Advisory Three,” Supply Chain Matters, 20 March 2011]. As noted above, the automotive industry is beginning its recovery; but Ferrari reports that recovery in the electronics sector could be mixed. He writes:

“While Qualcomm and Intel have issued statements indicating that global operations will be not be impacted by events in Japan, others remain in either a wait or see, or scramble mode to develop scenarios and plans to mitigate potential component shortages or severe price spikes. Texas Instruments as already stated that its two impacted plants in the region would not return to full operations until July. Much of the current concern is reflected on specific components related to NAND flash memory, DRAM memory, microcontrollers, LCD displays and electronic components. Many of the value-chains of these components incorporate some or significant sourcing from Japan. An analyst with Yuanta Investment Consulting in Taipei noted that 80 to 90 percent of the products that bond integrated circuits to glass panels for electronics displays come from Hitachi Chemical and Sony Chemical. Within the semiconductor value-chain, bismaleimide thiazine or BT resins utilized to bond chipset packages, and an analyst for FBR Capital Markets noted that major supplier Mitsubishi Gas Chemicals has its plant located close to the site of the nuclear reactor incident.”

Even before disruptions in the supply chain were created by the Japanese earthquake and tsunami, an Accenture report claimed that “most big US manufacturing companies are considering relocating factories from low-cost Asian countries to the US or Latin America as they face rising logistics and transport costs [“US groups weigh Asia exit as costs rise,” by Hal Weitzman, Financial Times, 20 March 2011]. Weitzman continues:

“The earthquake and tsunami in Japan, which have wreaked havoc on global supply chains, have underlined how multinational manufacturers can find themselves stranded without critical components. For example, General Motors, the US carmaker, plans to stop production … at a factory in Louisiana that makes pick-up trucks, due to lack of parts normally supplied from Japan. Boeing, the aircraft-maker whose 787 Dreamliner relies on Japanese manufacturers for more than a third of its parts, said it had enough inventory of components for the next few weeks, but was unsure of supplies beyond that. Jamco, the Japanese company that makes the 787’s galleys, warned that deliveries could be affected by fuel shortages. Caterpillar, the world’s largest manufacturer of earthmoving equipment by revenues, said its factories around the world could be ‘sporadically impacted’ by the disruption to its Japanese supply chain. The company has already located alternative sources for components produced by its Japanese suppliers. The problems in Japan could prompt big manufacturers to reassess the risks in their global supply chains.”

To learn more about supply chain risk management, read my four-part series on “Supply Chain Risk Management and Disaster Mitigation” [Part 1, Part 2, Part 3, Part 4]. Weitzman continues:

“The Accenture report suggests that, long before the earthquake, such companies were already looking at simplifying supply chains by bringing them closer to end-markets. Some 61 per cent of manufacturing executives surveyed by the consultancy said they were considering more closely matching supply location with demand location by onshoring or ‘nearshoring’ manufacturing and supply. Matt Reilly, Accenture’s managing director of process and innovation performance, said that this could lead to a wave of factory relocations in the next three years as big US manufacturers move production from Asia to the US and Latin America. ‘In the past five years, companies were driving at labor cost arbitrage and lower material costs,’ Mr Reilly said. ‘But now that oil and transportation prices have gone up, productivity gains are not as big as they were, and there are issues around risk in supply chains, companies are starting to go where the customers are, instead of where the raw materials are.’ He said the shift was also being driven by customer demands for quicker supply times and greater customization. ‘A lot of what’s going on in manufacturing innovation is about trying to get customer feedback quickly and injecting that back into the supply chain, so that features and functions can be changed quickly,’ he said. ‘It’s tough to do that when you’ve got stuff going on in Thailand or Japan.'”

In a number of past posts on globalization, I have predicted that we will see more regionalization for many of the reasons noted above. Rising transportation costs could make greater regionalization a reality sooner rather than later. One sign that manufacturing may be returning closer to home is the fact that “Procter & Gamble has opened a new manufacturing plant in Utah, its first new plant in the U.S. in 40 years.” [“P&G opens Utah plant,” by David Holthaus, Cincinnati.com, 16 March 2011]. I’ll have more to write on the topic of consumer customization, another topic raised by Weitzman, in a future post. He concludes:

“A string of other international companies have … cautioned that their supply chains could be disrupted by the Japan quake, including Sony Ericsson, Volkswagen, Volvo and GKN, the UK car and aerospace components manufacturer. Japanese companies are racing to reopen their plants at home, but they need all of their suppliers to reopen too. Nissan said it would restart five plants [this week], but only to make parts rather than assemble cars. Its output will depend on the supply of components and a sixth plant in Fukushima prefecture, near the stricken Daiichi nuclear plant. For its study, Accenture surveyed executives at 287 manufacturing companies, most with headquarters in the US.”

I agree with Bob Ferrari, who, in his initial post, wrote, “First and foremost, our thoughts and prayers go out to all of the people and associated families within Japan that have all been impacted by this tragic event.”