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Volume 27, Issue 3

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The Silver Lining in Japan’s Great Earthquake Disaster

The earthquake, tsunami, and ongoing radiation threat of “3/11” have delivered a telling triple blow to the people of Japan. With more than 15,000 confirmed dead and nearly 9,000 still missing, the loss of life, the physical destruction, and the human suffering caused by the events of March 11, 2011, have taken their toll on both the psyche and the economy. Nature has once again revealed its power in a humbling way. The scale and utter thoroughness of the devastation must be seen to be fully appreciated. Photographs and video simply cannot do justice to the vast destruction that stretches as far as the eye can see. Estimates of the overall cost already exceed $300 billion, easily making it the most expensive natural disaster on record. Yet, the Japanese people have proven themselves highly resilient in the past, and hardship is once again fueling new determination. The conspicuous supply chain disruptions have sparked a “business continuity renaissance” within the Japanese manufacturing community.

Despite the severity of the “Higashi Nihon Daishinsai” (literally: Eastern Japan Great Earthquake Disaster), in truth it was only a wake-up call. Direct damage from both the earthquake and tsunami were largely limited to relatively rural areas, so the most heavily populated and industrialized regions of Japan were almost completely undamaged. Even so, cascading effects were felt throughout the entire nation, and indeed, around the world. This disaster was a vivid demonstration of how easily disruptions at even relatively small, seemingly insignificant suppliers can shut down major factories on the other side of the planet.

While China has become “Factory to the World” in recent years, Japan remains the premier supplier of many high-quality materials, semi-finished products and critical components required in many of the most advanced products in the world. Your iPhone may say “Designed by Apple in California and Assembled in China,” but a significant portion of its parts, especially those higher value parts requiring highest technology, actually come from Japan. Whether based in China, Singapore, or the United States, and whether they know it or not, large numbers of manufacturing plants throughout the world rely heavily on one or more Japanese suppliers at some point in their supply chain.

Understanding The Japanese Supply Chain

While Toyota, Honda, Sony, Canon, and Nintendo are well-known household names, such famous companies live only at the very top of the Japanese manufacturing “food chain,” and they generally perform only final assembly at their own plants. Their assembly plants are supported by a complex hierarchy of suppliers and sub-suppliers. Due to pressures of the economy, some surprisingly small companies have evolved into critical sub-suppliers. The Japanese automotive industry provides an example of how this has occurred.

Over several decades, Japanese car companies have established themselves in the world market by continuously providing high quality automobiles at the most reasonable prices possible. Various economic factors, tariffs, and local content laws have led to increasing globalization (or “localization”), and the top companies now have assembly plants on all five continents. Much of their success can be attributed to their intense application of quality improvement methods (statistical process control) and stringent cost reduction methods (just in time), but it should be noted that truly meaningful application of these methods has required years of extremely strenuous effort from their entire supply chain, even down to the very smallest supplier’s sub-supplier.

Given the fact that a typical Japanese automobile contains tens of thousands of different parts, the assembly plants are being supplied by literally thousands of suppliers. Yet, only a relatively small number of those suppliers are direct “first-tier” suppliers. Those first-tier suppliers rely on numerous second-tier suppliers, who are in turn served by countless third-tier suppliers, and so on.Rhoden_Flag_opt

First-tier suppliers are often relatively large manufacturers in their own right, and they commonly establish their manufacturing plants in close proximity to the assembly plants which they supply. As the Japanese car companies have increasingly shifted their assembly plants overseas, these large first-tier suppliers have tended to go with them. Suppliers that were willing to move overseas help fulfill the requirements local content laws, so even second-tier suppliers may be prompted to locate overseas. Such localization of parts makers supplying the same or very similar parts to different assembly plants of a single automobile manufacturer leads to a certain level built-in redundancy within the supply chain. But small suppliers, especially those near the bottom of the “food chain,” usually have little incentive to localize. They typically manufacture relatively small components that can be efficiently shipped by air. So, it was these kinds of highly specialized small suppliers that were affected on March 11, 2011, and initiated the cascading disruptions that have led to such significant repercussions in global automobile manufacturing.

Rhoden_NGU_Japanese_optSuch supply chain disruptions were not entirely unanticipated. Back in 2007, a comparatively small earthquake in northwestern Japan disrupted the operations of a highly specialized manufacturer of engine components. Interestingly, this supplier outsourced a portion of its manufacturing process to another, even smaller local company whose sophisticated electroplating technique was so finely tuned to the needs of this particular component that it would have taken considerable time to duplicate this critical process elsewhere. As it happened, the earthquake damage was not as severe as it could have been, and with the assistance of large teams of engineers and technicians provided by the affected Japanese automobile companies, both the engine component manufacturer and the electroplating company were able to restart their operations within a “reasonable” amount of time. Even so, several major automobile manufacturing plants in Japan were shut down for nearly a week. So, the need for effective business continuity strategies for even the smallest and lowest-tier suppliers has been recognized by many business continuity practitioners in Japan, yet tangible progress is being slowed by the seeming lack of viable business continuity strategies that are both effective and cost efficient, even when applied to such small companies.

A Japanese Solution To A Japanese Problem

This same “highly-specialized small-supplier” phenomenon is commonly be seen in other Japanese industries as well. Long years of ever increasing pressure to improve efficiency and lower costs (without sacrificing quality) has led to extreme specialization. There are now countless medium and small suppliers in Japan who dominate the global market for their extremely specialized products. And, these relatively small companies are almost invariably supported by even smaller companies. Few people realize the extent to which global manufacturing is being sustained at its lowermost tiers by small Japanese companies with unique skills.

Some of these smallest sub-suppliers resemble high-tech “cottage industries” and the experience, personal dedication, and craftsmanship of their individual employees often play a role in their ability to provide unique products. This may explain why these companies tend to be located in rural Japan where pride in workmanship remains the highest while cost of labor remains the lowest. Often without significant financial reserves, these small, yet technologically important companies usually have no interest in duplicating their facilities at some geographically diverse location. Simply demanding redundancy from such companies “or else” would likely result in throwing the baby out with the bathwater.

Japan is, in fact, highly earthquake prone and no amount of “earthquake proofing” measures can ever be deemed truly adequate. Only suitably distant geographic diversification can provide truly credible assurance of continuity in a worst-case scenario. Furthermore, even a fire or some other major accident could require similar redundancy, so earthquake mitigation cannot be considered an effective strategy.

This reality has proven to be a subtle business continuity problem that requires an appropriate “Japanese” solution. While reciprocal agreements have generally not found much favor among the worldwide business continuity community, the authors have pioneered a kind of reciprocal strategy that takes full advantage of longstanding Japanese cultural attributes and relatively unique attitudes toward contractual obligations. While achieving business continuity is the goal, this reciprocal strategy resembles a high-tech “artist’s guild” which provides other benefits as well. Sometimes only a fellow “artist” can fully appreciate true artistry, so this “guild” serves as a kind of network for “artists” (small highly specialized companies) with similar technological skill sets. Once the initial ice has been broken, and a certain level of trust achieved, remarkable synergy can be generated from open exchange of information and technology. When it comes to achieving business continuity, such a “guild” allows a fellow skilled artist to learn how to duplicate the work of another artist. Redundancy can thus be achieved at little or no cost to either party, making geographic diversity a viable economic reality.

Not Only A Continuity Strategy, But A Business Strategy

While simple enough in concept, as a practical matter it is not always easy to get potential competitors to agree to work together in such a synergistic fashion. The Japanese cultural tradition places great value on cooperation, but inertia and suspicion can prevail until both parties recognize the potential business opportunities. Threats of doom from some future earthquake do not provide the same incentive as immediate strategic benefit. Happily, such immediate strategic benefits do exist.

One example is reducing lost opportunities. Longstanding customers usually turn to their existing supplier base with their new development needs, but they also usually require short lead-times. A small supplier may be forced to turn down such a potentially lucrative new opportunity if they happen to be fully occupied with existing production. In such a case, even the most loyal customer is forced to seek out another company to help them develop their new part, and this is not an unusual occurrence. With a strategic reciprocal agreement, such a supplier may be able shift some or all of their existing production to their prearranged “redundant facility” and thus take advantage of the new opportunity.

While medium-sized and small businesses play an important role in every economy, these small yet technologically sophisticated small companies in Japan are now being recognized as unique and valuable assets. “Reciprocal networking” allows such companies to be more responsive to market needs and far more robust in times of disasters. Participants enjoy increased visibility and gain new knowledge of the marketplace. Many of these companies have no real sales force, so such “networking” greatly enhances their marketing ability. And of course, the geographically diversified redundancy provides them with the assurance of continuity even in the event of disaster. This is a true “win/win” strategy that is not only helping to bring about a renaissance in Japanese business continuity but possibly a renaissance in Japanese business as well.

Shinji Hosotsubo, CBCP, was one of the first proponents of business continuity in Japan. He founded the Crisis Management and Preparedness Organization in the aftermath of the 1995 Kobe Earthquake, and in 2006 he founded Business Continuity Advancement Organization, the leading membership organization for practitioners of BCM in Japan. Hosotsubo remains secretary-general of both of these two non-profit membership-driven organizations. As of 2010, he is also chairman of Crisis Management Education & Exercise Center (CM-EEC), a non-profit foundation dedicated to imbuing effective crisis leadership skills within private and public sectors.

Nathan Lee Rhoden was born in Japan and speaks Japanese with native fluency. For the past 15 years Rhoden has worked with Hosotsubo to promote crisis management and business continuity in Japan.