Japan earthquake produced 'cultural change' on supply chain risk

Permanent shift in thinking about supply chain continuity, BCI survey finds

Unlike previous natural disasters, the 2011 earthquake in eastern Japan might have brought about a permanent change in how businesses regard supply chain risk, according to a survey by the Business Continuity Institute (BCI), a non-profit organisation based in Reading in the UK.

82% of companies whose supply chains were affected by the earthquake, or by the February 2011 earthquake in Christchurch, New Zealand, said they would change their supply chain policies as a result – the 2011 floods in Thailand, the country's most costly natural disaster in financial terms and one that affected a number of manufacturers based in flooded areas, also played a role in the change of heart.

Lyndon Bird, the BCI's technical director, says the changes resulting from 2011's series of disasters are far broader than those triggered by previous events such as the 1995 Kobe earthquake in Japan – and look more likely to be permanent.

"With Kobe and other similar events, the companies operating in the directly affected areas  learned lessons, but the international community, even those with long supply chains, didn't seem to," Bird says. "We've never seen this level of interest and questioning before. Previously, the events were maybe seen as one-offs – now there has been a cultural change and people are starting to relate them, for example, to climate change and ask if there will be more problems like this in the future. In the past, perhaps they looked at risk in terms of economic and geopolitical stability – now they are looking at geological and climatic stability as well."

Government agencies have warned climate change will mean an increase in the number and severity of weather events. While this will not include earthquakes, it will mean other events, such as the damaging 2011 floods in Thailand, will become more common.

Bird believes this might mean an end to the habit of putting efficiency top of the priority list – if it means sacrificing resilience. "I think the conclusion is that organisations have taken squeezing cost savings out of the supply chain perhaps as far as it could go. In some cases it brings additional risks and reduces resilience. Going forward, you might find that being able to give customers confidence in your resilience allows a premium charge to be made – or companies might consider local rather than east Asian suppliers, for example."

He adds that the events of 2011 have also made more companies aware of the need to check all levels of their supply chains. "We found that the third-biggest cause of supply chain problems in the US was the earthquake in Japan. That was a real surprise for us, given the number of natural disasters that have happened in the US as well. And even in Japan, people were affected through third- or fourth-tier suppliers that they hadn't monitored – they had only looked one level down. Or they found that, while they thought their suppliers were elsewhere in Asia, the suppliers were in turn relying on intellectual property or suppliers in Japan."

More extensive supply chains also played a part in spreading the effects of the 2008 economic crisis more quickly and more widely than previous events, a European Central Bank research project found earlier this year. The study's authors found that previous crises had not seen the same sharp and synchronised drop in trade flows worldwide, and suggested that modern global supply chains had contributed to a "bullwhip effect" that amplified the impact of the crisis as it spread around the world through international trade relationships.