The earthquake and subsequent tsunami that has devastated Japan is a human tragedy of significant proportions. The resilience of the Japanese people will be tested as they emerge from this crisis. In addition to the human toll, Japan’s economy is also suffering heavily. Barclays Capital estimates that the damage from the earthquake and tsunami will exceed $180 billion.
The damage from the crisis has led to rolling blackouts, power outages, damaged infrastructure and the abandonment of entire industrial areas due to high levels of radiation. As business owners, we have to take into account what this crisis means to our operations. Even if you don’t do business in Japan or with Japan, odds are your business will be impacted.
The Beige Book released on April 13th indicates that seven of the 12 regions in the U.S. have been negatively impacted by the Japanese crisis. They are: Boston, Philadelphia, Richmond, Atlanta, Chicago, Minneapolis and Dallas. Read my Beige Book article to learn more about its importance.
Want to read more about global supply chains? Check these out:
The global supply chain...
The reason why the impact is so significant is because Japan, and especially the region around the Fukushima nuclear plant, plays a key role in the supply chain of manufacturers around the world. According to CLSA, Asia’s leading independent brokerage and investment group, 40 percent of electronic components manufactured annually are made in Japan. Nineteen percent of all semiconductors are manufactured in Japan. Last year the United States imported over $125 billion of goods and services from Japan.
Given its expansive scope, many manufacturing firms—entire sectors in reality—will experience a shortage in components and as a result will have to slow down or shut down production while alternatives are sourced. Automotive companies such as Honda, Toyota and Nissan have had to shut down production not only in Japan, but also abroad due to a lack of component availability. Honda vehicles manufactured in the U.S. contain around 20 percent component parts sourced from Japan.
...and lean manufacturing
More companies have also implemented lean manufacturing programs. Lean manufacturing is a production practice that considers anything that doesn’t add value to the end product as waste that should be targeted for elimination. Toyota is the best example of an adherent to lean manufacturing principles. One of the two pillars of lean manufacturing is just-in-time inventory or JIT. JIT relies on the reduction of in-process inventory and inventory carrying costs. While having less component part inventory in stock for less time reduces costs, it also increases dramatically the risks a company takes on in the face of a rare crisis.
What can you do now?
First, determine the scope of your problems.
Even if all of your suppliers are domestic, contact them to determine if any of their component suppliers or raw material sources are located in Japan or are impacted by the crisis in Japan.
Second, identify alternate vendors
If you do rely on components from Japan then hopefully your company already has a contingency plan in place and is executing it at this very moment. But if not, then start securing contracts with alternate vendors immediately. Companies around the world are doing this right now. If your components are highly specialized, consider a redesign or at least a temporary workaround to keep your production going.
Third, contact all of your customers
Assure them that your company is aware of how the crisis will affect production and outline the steps taken to mitigate the risk. Even if you are not impacted in the least, your clients may not know this. Don’t leave them guessing.
Finally, monitor the situation carefully
The extent of the damage is not yet clear. Perhaps this will be resolved in a matter of weeks. Or perhaps it could take decades. Be sure to follow the latest developments so you can make the best decisions for your business and your customers.