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Volume 27, Issue 4

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Earthquakes Rattle Supply Chain

For the first time in its 40 year history, a “bullet train” actually derailed while in service. Miraculously, none of the 155 passengers or crew were injured – even though the train was speeding along at 125 mph on a section of track elevated 50-feet off the ground. Eight of 10 train cars derailed, with two tilting over to one side. Experts said the train’s sophisticated automatic braking system likely failed to stop it in time because it was passing too close to the earthquake epicenter.

Response to the Niigata Chuetsu Earthquakes is largely viewed as successful. The Japanese government established their EOC at 6 p.m., just four minutes after the first jolt. And the National Police Agency, the Defense Agency, the Fire Defense Agency, and the Maritime Safety Agency all responded in a timely and relatively coordinated manner. Live television provided one particularly memorable scene as fire department “Hyper-Rescue Unit” personnel saved a 3-year-old boy from a car that had been buried by a landslide for four days.

Business losses were significant. Small businesses were devastated in large numbers, and the important tourism industry was severely curtailed. Widespread damage to transportation infrastructure made logistics a nightmare. Persistent aftershocks kept fearful residents from re-entering their homes or shopping in retail structures. Major supermarket chains such as Jusco and Beishia responded by conducting business outdoors in large tents pitched in parking lots.

Despite the rural mountain setting, several semiconductor plants were affected. Alps produces magnetic heads at its Nagaoka and Koide plants, both located only about 12  miles from the epicenter. Matsushita’s Arai fabrication facility is located about 40 miles away. Neither company reported any serious damage to facilities or any injuries among employees, but both suspended operations for several days and found it difficult to assess plant damage because of continuing aftershocks.

For Sanyo, assessing clean room damage and gas leakage proved to be an especially challenging task. Niigata Sanyo Electronics, a subsidiary of Sanyo Electric Co. Ltd., is located in Ojiya, near the center of the earthquakes. With sales totaling $460 million last year, this subsidiary is Sanyo’s largest front-end LSI semiconductor fabrication facility.
The plant runs 24 hours a day and was occupied by 200 employees when the earthquake struck. Production was immediately stopped and employees evacuated. No one was hurt and initial damage was thought to be minor, mostly limited to items such as broken glass. The outer building was not significantly damaged, but aftershocks made it difficult to determine the extent of damage inside.

Sanyo quickly dispatched a team from its headquarters to assess damage to the plant, but intermittent aftershocks and suspected gas leaks prevented the team from entering the clean room. Two weeks later, a thorough investigation of damage inside the clean room confirmed the presence of dangerous gas leaks. Sensitivity to environmental issues and community concerns have further delayed resumption of operations. Utilities were completely restored by Nov. 30, and test production began again on Dec. 6, yet, to date, full production has not resumed.

While accessing damage to their stricken Ojiya plant, Sanyo sought to increase foundry production elsewhere. Wherever possible, they shifted production to other group companies, and actual production began at some alternative sites by early November. Ojiya plant employees were either dispatched to these alternative plants to assist in production or asked to “stand by” at their homes.

Despite such efforts, Sanyo Electric Co. Ltd said it would take a $480 million charge to cover damage at the Niigata subsidiary plant and a further $350 million charge to cover lost sales. Details of the “damage” portion were itemized as $180 million for damaged machinery, $40 million from damaged inventory, $260 million for restoration costs, and $3 million in new capital investment.

The Japanese automobile industry also felt the impact of these quakes. Nippon Seiki Corporation has group companies and plants in the region. One of them, NS Advantech, suffered major damage to its meter assembly plant. Nippon Seiki decided to shift their automobile and motorcycle meter assembly production to another plant in the area, and thanks to rather heroic efforts from employees, alternative production began within a week. But, even so, supply lines were so tight the temporary disruption forced some customers to stop production at their major assembly lines.

Honda Motor Co., Ltd. halted production for two days at its Saitama and Suzuka automobile factories, its affiliate’s Yokkaichi factory where its mini-cars are manufactured, as well as at their Kumamoto factory, where automobile engines are produced. Likewise, Yamaha Motor Corporation, which purchases 80 percent of its motorcycle meter needs from NS Advantech, was also forced to shutdown their assembly lines for two days.

Nippon Seiki was able to return meter assembly production to the NS Advantech facility by Nov. 28, and it is said they were back up to 90 percent of their original capacity by the end of the year. And, both Honda and Yamaha said they were able to make up for their lost production before the end of the year, by operating on “make up” days when their facilities would ordinarily have been scheduled to be closed.

So, true to form, traditional Japanese corporate values such as employee dedication, strong relationships with suppliers, and complex ties between group companies have once again assisted in minimizing the impact of a potentially severe supply disruption.
Nevertheless, these little ripples from the Niigata Chuetsu Earthquakes should remind us all of the inherent vulnerability of complex supply chains operating with “just-in-time” inventory. And, traditional Japanese corporate values will not always prove be adequate protection. A serious fire at a Mazda automobile plant last December served as another wakeup call, and many major Japanese manufacturing companies are currently studying how to upgrade their business continuity measures.

And while significant “business ripples” can emanate from any of the increasing number of modern factories and plants located in rural Japan, it is still the major urban disaster that presents the greatest risk. The vast majority of Japanese industry is still located in a handful of concentrated urban areas. A major urban disaster will place a real premium on accurate and strategic business impact analysis, while stressing the most ambitious business continuity plans to their very limits.

For the most part, Japan remains a manufacturing nation that relies heavily on highly efficient supply chain management methods. Yet, the cost-saving advantages of such methods are often in direct conflict with the prudent needs of business continuity management. We are working in Japan to develop a practical and functional supply chain BCM methods that take into account the realities of doing business in Japan.

Shinji Hosotsubo is the secretary-general of Crisis Management and Preparedness Organization (CMPO), a membership-driven, non-profit organization whose primary mission is to increase disaster awareness and preparedness among Japanese corporations and communities. He also serves on an official Japanese government working group to establish appropriate standards and evaluate BCP performance among Japanese corporations. He can be reached at hosotsubo@cmpo.org.

Nathan Lee Rhoden was born and raised in Japan, and has spent most of his professional career performing new business development for Japanese companies around the world. Rhoden currently works in Tokyo and has been on the CMPO board of directors since 1999. Contact Rhoden by e-mail at rhoden@cmpo.org.

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