The earthquakes in Japan last Thursday and Saturday, which killed at least 41 people, show just how vulnerable supply chains are to natural disasters. They also put companies’ lean supply chains and contingency plans in a spotlight.
Toyota announced on Sunday it would suspend much of its production at plants across Japan this week as it was unable to source parts from some of its suppliers, including affiliate Aisin Seiki. Meanwhile, Honda said it would keep production suspended at its motorcycle plant near the earthquake-hit city of Kumamoto in southern Japan through this Friday.
Sony also released a statement, announcing that production would remain halted at its image sensor plant in Kumamoto, as the company continued to assess structural and equipment damage. It did announce, however, that it had resumed full operations at its plants in nearby Nagasaki and Oita, which also produce the sensors used in smartphone cameras such as Apple’s iPhone.
Also on Sunday, semiconductor manufacturer Renesas Electronics confirmed it had sustained damage to some equipment at its plant in Kumamoto that produces microcontroller chips for automobiles. Having suspended operations following the first earthquake on Thursday, the chipmaker said it would assess damage at the entire facility before deciding when to resume production.
The aftermath of these earthquakes will certainly test the business continuity plans that many Japanese companies created after natural disasters hit the nation’s east coast five years ago and disrupted operations for months. The 2011 earthquake and resulting tsunami, which led to a nuclear disaster and nearly 20,000 deaths, badly decreased production output. Since then, many companies have made efforts to address supply chain risk and vulnerabilities.
For instance, since 2011, Toyota, which spent weeks at the time identifying how its suppliers had been affected by the earthquake, and Nissan have both developed supply chain databases which offer a detailed view of their supplier base to identify how their supply chain may be disrupted during emergencies. The resulting strategy is particularly important for Toyota because it relies on domestic manufacturing more than its peers. The company and its affiliates made more than four million vehicles in Japan last year—40 percent of their worldwide output. In contrast, Nissan and Honda’s shares of auto production from Japan were 17 percent and 16 percent, according to a Bloomberg article.
“Owing to the lessons learned from the Great East Japan Earthquake, the automakers and their suppliers have together built up strong procurement networks for components that can be rapidly restored following disasters,” Nomura Holdings analysts wrote in a report Monday, Bloomberg notes. “As such, even supposing that production at Japanese automakers is affected for several weeks, we think that they will quickly return to normal and be able to minimize effects” to full-year earnings.
One key component for Toyota will be the response from Aisin Seiki, which produces engine, drivetrain, body and chassis, aftermarket and other main automotive parts for various major OEMs. The company’s plants in Kumamoto sustained damage from the recent earthquakes, and a company spokesperson said the company will make the parts produced in those facilities at home and abroad. The parts include sun roofs, door handles, semiconductors and other products.
“As a Toyota-affiliated company, we don’t hold significant inventory,” an Aisin spokesman said, Reuters, reports. “So as a rule we wouldn’t have been holding inventories to last, say, one week or a month. If there’s a part we make in Kumamoto which is identical to a part we make at the Aisin headquarters in Aichi [in central Japan] we’ll shift production there.”
While it will be interesting to see how resilient these supply chains are and what—if any—long-term impact comes into play, our thoughts are also with the people of Japan.