Images of the devastating tsunami that hit Japan on March 11, 2011, are still fresh, and will continue to shock us for many years to come. The daily challenges of managing supply chains seem insignificant alongside the aftermath of this terrible disaster, but as the recovery effort progresses we can begin to draw some lessons from the experience.
One that stands out is the interconnectedness of supply chains. Shock waves from the disaster rippled through the computer chip and auto industries at lightning speed, causing severe supply disruptions across the globe. It will take many months for these industries to repair the market damage.
Some important disaster recovery lessons are emerging from the rubble. Even companies that take risk management relatively seriously were caught unawares by the scale of the catastrophe. But those that responded quickly are now in a better position to recover. Manufacturing capacity in certain key areas was suddenly in short supply when northern Japan was flooded, and the nimblest responders were able to secure alternative capacity ahead of slower competitors. Some enterprises were creative, such as the auto manufacturers that dredged through old RFPs to find alternative suppliers.
But perhaps one of the most far-reaching lessons pertains to how we plan for extreme events. According to an investigation by the Associated Press (AP) 1 engineers from Tokyo Electric Power Company – the company that owns the Fukushima Dai-ichi nuclear reactor complex that was damaged by the tsunami – disregarded evidence of earthquakes before 1896 when postulating the maximum-size quake and tsunami that the complex might face. Yet there is ample geological evidence that major quakes have hit the region prior to that year, points out AP.
The overly optimistic projections are tied to the way the Japanese calculate risk, AP concludes. “Because of the island nation’s long history of killer waves, Japanese experts often will look at what has happened — then project forward what is likely to happen again,” says AP.
Many supply chain managers use a similar approach to forecasting. Whether we are forecasting product demand or trying to anticipate movements in fuel prices or freight rates, there is a tendency to use past experience as a guide to future behavior. We have seen time and again that this approach is flawed, particularly as supply chains and the businesses they support have become much more complex.
Maybe a better approach is to use scenario planning to prepare for future disruptions. Companies such as Shell have been using this method for a number of years, and some very interesting supply chain applications have been developed by Dr. Mahender Singh at the MIT Center for Transportation & Logistics.
The basic premise of Singh’s approach is that instead of seeing the future as a single, backward-looking, linear path that starts in the past or the present, companies need to consider many possible paths. This is accomplished by creating multiple scenarios based on plausible future worlds, and brainstorming the implications of each scenario. The results are used to develop risk management strategies that prepare the company for various outcomes.
Simulating possible outcomes through scenario planning reveals both the kinds of uncertainty that companies face and potential courses of action. The scenarios can be constructed to explore particular business issues and environments or they can be more generic in nature.
We will look at scenario planning in greater depth in a future post. For now, our deepest sympathies go out to the victims of the tsunami, and best wishes for a speedy recovery.
1 “Nuclear plant downplayed tsunami risk,” Yuri Kageyama and Justin Pritchard, Associated Press, 27 March 2011.