Japan earthquake forces businesses to rethink their global supply chains

The business of shifting minute components from one place to another is not something that usually gets much attention outside of those directly involved with managing supply chains. The devastating earthquake and tsunami that struck Japan on 11 March, and the ensuing nuclear crisis, have changed all that.

The disruption caused to the production capabilities of some of the world’s leading automotive and electronics manufacturers has raised questions about the vulnerability of global supply chains. Thousands of multinational companies that rely on Japanese manufacturers for goods and services can expect disruptions that will last up to several months.

With about 20 percent of all semiconductors and 40 percent of all flash memory chips in the world made in Japan, the hi-tech electronics sector is the hardest hit, followed by the steel and automotive industries – and businesses that depend on these industries, such as producers of medical devices, communications gear suppliers, car dealerships, shipbuilders, consumer electronics and the aviation industry.

Toyota is facing a potential credit rating downgrade from Moody’s, largely because of disruptions to its supply chain. Though its factories did not suffer serious damage, shipment of key components has been disrupted forcing temporary closures of some of its factories in the UK. Meanwhile, Sony says it may be forced to delay the global release of its next-generation PlayStation Portable gaming device because of production disruptions.

However, Toyota and Sony are just two of many Japanese manufacturers whose supply chains have been disrupted by the natural disaster and its aftereffects. Steve Clayton, UK and Ireland chief financial officer at Fujitsu, says the Tokyo-based group has had to take action.

“We have shifted production from those factories in the worst hit areas to other plants in Japan that are not as badly affected,” Clayton tells Financial Director. “This has helped to maintain a good supply of components and allowed us to continue to ship products out of the country, though not at the same rate as before the earthquake.”

Under the bonnet

A major headache for finance directors in analysing their company’s potential vulnerability to such supply chain disruptions is the sheer complexity of the systems involved. For example, a recent study of the Apple iPhone by the Asian Development Bank found that manufacturing the US-designed product involves nine companies that operate in China, South Korea, Japan, Taiwan, Germany and the US.

The iPhone is not unusual in this respect. Other supply chains are just as tortuous and complicated, which can be seen in the manufacture of everything from LCD televisions and kitchen appliances to baked pastry goods. A disruption to any individual manufacturer in the system can derail the whole process.

Read our blog on Apple’s supply chain weakness at tinyurl.com/FDapple