The headlines were eager to declare defeat: “Japan Earthquake Hobbles Car Makers” ... “Disasters Show Flaws In Just-In-Time Production” ... “Lean Production: Another Casualty of the Japanese Quake?”
Quicker than you can say “Toyota,” pundits began to question the just-in-time inventory strategy as the global supply chain recuperated from the March 2011 Japanese earthquake.
Part of an overall “lean” strategy to streamline the manufacturing process, companies using the just-in-time approach keep small amounts of inventory, often just what is needed on a given day. But when entire manufacturing facilities were shut down due to the earthquake, the ramifications were felt worldwide. GM halted production and laid off workers at plants in Buffalo, N.Y., and Shreveport, La., because of shortages of parts from Japan.
So are the disruptions caused by unforeseen natural disasters a serious chink in the just-in-time armor?
Not so fast.
“The flip side of leaner supply chains is that processes get streamlined and standardized, which improves the ability to recover,” says Sridhar Seshadri, professor of information, risk, and operations management at the McCombs School of Business and author of the book Toyota Supply Chain Management.
Inability to streamline supply chain processes can actually magnify the negative effect of even a relatively small disruption. For example, a March 2000 fire at a sub-supplier of the mobile phone maker Ericsson lasted just 10 minutes and was relatively small as it was contained in a “clean room.” However, the disruption to supplies lasted nearly three weeks, and even months after the fire, the yield from the supplier was only 50 percent. Not only did the company lose months of phone production, some in the industry feel that the accident resulted in Ericsson eventually abandoning the mobile phone business.
Seshadri suggests that rather than scrapping the just-in-time approach, companies need to bolster their disaster preparedness, a strategy many firms ignore when times are good.
Seshadri’s research partner, Atanu Chaudhuri at the Indian Institute of Management in Lucknow, India, says deciding who owns disaster preparedness is also a challenge.
“[One department] might not have complete understanding of the operational implications of the various risks,” Chaudhuri says. “It needs to be a cross-functional activity probably under a chief risk officer.”
Seshadri and Chaudhuri recommend a four-step approach to disaster preparedness:
- Classify products and industries based on the transparency required by regulators and shareholders. “Industries that require less transparency or regulation might be more prone to unexpected shutdowns,” Seshadri cautions.
- Create a potential disaster map for all global locations of the company, its suppliers, and competitors. Base the map on the history of natural disasters, accidents, supply shortages, and labor unrest in the area. This will help predict frequency of occurrence of disasters and thus allow for greater preparedness.
- Classify potential disasters to create a location’s overall risk rating. Rate the severity of a disaster by assessing its impact on the firm, industry, society, shareholders, and the entire supply chain. Also, attempt to identify the kinds of impacts each type of disaster might have on a company. Impacts can take the form of sales losses, high costs, and recovery time, with an overall impact on the company’s financials in a quarter or over the financial year.
- Prioritize disaster management actions. Create safety standards and determine related costs. Build in flexibility to be able to temporarily shift production to other facilities. Create a detailed response plan for evacuation and recovery.
“Good companies will follow these principles, but will know how to adjust and adapt in extreme situations when things go wrong,” says Chaudhuri.
A recent article commended semiconductor maker Fujitsu for its very quick recovery from the Japanese earthquake. Fujitsu’s five wafer fabrication plants were back at pre-earthquake production levels less than three months after the earthquake. Preparedness was the key to their recovery – the company had developed an emergency response strategy after a 2008 earthquake, increasing their production flexibility and introducing redundancies into their production capabilities.
Honda, Toyota, and Nissan, which were expected to take up to a year to recover production capacity, have already recovered much of their capacity. The availability of the Apple iPad2, announced days before the quake, was supposed to be greatly affected by the quake, but that shortage never materialized.
The bottom line? “Lean philosophy is a system-level philosophy and it works,” says Seshadri. He stresses that lean is about minimizing waste – not about simply stocking less of everything – and should include planning for supply-chain disruptions due to disasters. “From standards and protocols to communications and behavioral aspects of decision-making, lean philosophy does work to anticipate and recover from problems.”