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PROPERTY & CASUALTY
APR 24, 2018
Natural Disasters- Breaking the Links in the Chain
The devastation felt near the epicenter of a tornado, earthquake, or hurricane is immediate. Survivors close to a natural disaster often have to cope with the loss of life, destroyed homes, property, and businesses. Area companies experience interruptions in their abilities to manufacture or distribute their products. But the potential for disruption isn’t just confined to the geographical area that experienced the disaster. A powerful force wreaks havoc far beyond its immediate impact, it can have regional, national and global business implications.
One example of this was after the 9.1 magnitude earthquake that hit Japan in March 2011. It was the most powerful earthquake ever recorded in that country, and a devastating tsunami and nuclear disaster followed. Japan has the third largest economy in the world and it manufactures products in the most highly advanced and innovative industries.
Toyota is the largest company in Japan and it has long been revered for its leading-edge supply chain management system. They pioneered lean production processes for efficiency and profitability. But because they and other Japanese manufacturers were operating lean, they were especially vulnerable to natural disasters. When the disaster hit, Toyota’s factory assembly lines were shut down immediately and it took more than a month until they were running at 50 percent. A few months later in June, production ran at 70 percent. Toyota’s production in North America was also affected. Due to a shortage of 150 parts typically produced in their Japanese plants, production was cut by almost one-third for six months. In the second quarter of 2011, Toyota experienced a 77 percent fall in profits, equivalent to more than one billion dollars.
During that same disaster, the global automotive industry overall experienced disruptions with the shutdown of a paint pigment factory in Onahama near the Fukushima-Daiichi nuclear power station in Japan. The plant escaped major damage, but it was inaccessible after the earthquake. This was the only location in the world where a German chemical company, Merck KGaA, produced Xirallic, an aluminum-flaked pigment that makes paint sparkle. Automakers, including Ford and Chrysler, couldn’t get their hands on that glittery shine and had to restrict vehicle orders on certain shades of black, red, bronze, green, ivory and silver.
Since that time, Japanese companies have had to balance their lean production desires with their need to be resilient to natural disasters and potential supply chain disruptions. This has meant increasing stockpiles and diversifying sourcing. Toyota implemented mitigation strategies in 2011, soon after the earthquake. Their five-year plan had a goal to recover from a disaster within two weeks. Toyota was able to test their program with a series of earthquakes in April 2016. The automaker initially had to suspend production in Japan. But, they soon bounced back and were able to restore full production later that month.
Today, in Japan; Germany; and Savannah, Georgia, Merck warehouses a few months supply of the sparkly pigment, Xirallic. As another safeguard, Merck now manufactures the pigment at a plant in Gernsheim, Germany. If their factory faces another natural disaster, they’ll have adequate Xirallic to satisfy their customers.
Last year, North America became the most disrupted region, when looking solely at naturally occurring events. Hurricane Harvey dumped about 33 trillion gallons of water on U.S. soil, the majority on Texas and Louisiana. Nearly 800 factories, distribution centers, and warehouses in Texas were affected, according to one estimate. Nearly $600 billion in economic activity happens in this region of Texas, with its busy ports that trade worldwide. Luckily, Harvey didn’t bring a storm surge, which can be the greatest threat to property. When Hurricanes Katrina, Rita, and Ike had high water with a storm surge, the nation’s refining and chemical industries took a substantial hit.
Research has shown that weather-related disasters will become more common by the end of the century. Companies must have organized programs in place to avoid supply chain interruptions and build resilient supply chains.
Tips for dealing with disaster
Create and implement a complex crisis management strategy, which considers all links throughout the supply chain
Utilize technology and data to monitor the flow and interruption of goods
Depend on trusted and strategic partners, including alternate suppliers
Assess risks and maintain sufficient insurance for your business and equipment
Communicate in real time and be transparent and flexible with suppliers, staff and partners