2011 Japanese Earthquake: Business Impact and Lessons Learned

Introduction

On March 11, 2011, a magnitude 9.0 earthquake devastated the chief island of Honshu, Japan. The earthquake, the subsequent tsunami, and their consequences caused devastating personal, social, and economic harm. People worldwide were stunned by footage of exploding nuclear power plant buildings, flattened cities, and personal accounts of survival. The disaster also seriously disrupted global manufacturing supply chains. This paper expounds, through modelling, comparison, and analysis, the issues that caused business interruptions, the businesses affected, operations management challenges, and the effectiveness of business decision-making in relation to the 2011 Japanese earthquake.

Earthquake Risk Modelling

To manage earthquake risk, it is essential to know the size of the risk and the degree to which it can be reduced by taking a particular action or set of actions. We therefore need to be able to quantify one or more of the nine socio-economic consequences of earthquakes. Earthquake risk is generally quantified by computer modelling, which takes account of the hazard and the quantity and nature of the people and/or property at risk. To fully account for seismic hazard, not only ground shaking must be considered, but also associated earthquake-induced hazards — including geological consequences such as liquefaction and landslides — as well as earthquake-induced fires.

Earthquake risk modelling is carried out for a wide range of elements of the built environment, including buildings, the contents of buildings, fixed and mobile plant and equipment, and lifelines. Such modelling may be carried out in its own right and is also a necessary first step in modelling the risk of death or injury to people. Another step in risk modelling and management is to identify all contributing factors that could be improved in order to reduce risk, as examined in the context of the 2011 Japan earthquake.

Material Damage Costs

The most common type of earthquake risk modelling is the estimation of the direct financial cost due to material damage to a subset of the built environment. This is done for widely disparate sets of property — ranging from a single item or collection of items, such as the contents of a particular building, to all or a selection of property in an entire city, or for total losses from a given earthquake. Damage costs directly attributable to ground shaking are typically estimated using empirical damage ratios, such as in the case of a large earthquake occurring on a surface-rupturing fault.

Business Interruption and Supply Chain Effects

By the term "business," we refer here to any organization — shops, factories, schools, clubs, hospitals, governmental bodies, and so forth. Business interruption is the name commonly given to the costs of loss of business arising from any cause — in this case, from an earthquake. Business interruption is one of nine socio-economic consequences of earthquakes and is among the hardest to model. There are three general areas that may cause business loss:

Upstream effects are those related to supplies of anything a business uses or consumes, such as power, raw materials, or components. Downstream effects comprise damage to dispatch routes or loss of a market — for example, when a customer's business is itself disrupted. Direct material damage constitutes the third area of potential business loss.

The consequences of an earthquake can be both negative and positive for any given business. An illustrative example comes from the 1987 Edgecumbe, New Zealand, earthquake, in which the public hospital in the largest affected town was put out of commission for some time (Fluchter, 2003). This caused a serious decline in business for the local undertaker — who was not insured against such a loss — because fatally ill patients were being sent to hospitals elsewhere. This, of course, led to a corresponding increase in business for undertakers in other locations. Business interruption can be caused by local or distant earthquakes, even those occurring in other countries. The effects on businesses are clearly highly variable and often unpredictable.

There are a range of very different possible outcomes that can be considered either as applying to different businesses or as alternative negative and positive outcomes for the same business under different scenarios. Because of this inherent variability, the estimation of earthquake effects on businesses is best studied by considering various likely scenarios and modelling a range of possible upstream and downstream effects for each. Such modelling involves estimating the length of time after the earthquake that each consequence persists. One notable example is the modelling of time delays caused by damage to the transportation system in the San Francisco Bay Area following a hypothetical magnitude 7.5 earthquake on the San Andreas fault (Milliken, 2011), using a GIS-based methodology to address this complex problem.

Research company IHS iSuppli Market Intelligence released a report on the state of the Japanese technology industry and the potential impacts of the earthquake:

Japanese firms accounted for more than one-fifth of worldwide semiconductor manufacturing in 2010. Companies headquartered in Japan produced $63.3 billion in microchip revenues in 2010, representing 20.8% of the global marketplace. Japan-based companies ranked third in semiconductor manufacturing among the world's major chip-producing regions. DRAM manufacturing in Japan accounted for approximately 10% of the global supply of wafer production (Rowinski, 2011).

Conclusion

Natural disasters and supply chain interruptions are unavoidable. To protect their revenue and market share, manufacturers must work proactively with all their vital suppliers to map supplier factory locations and ensure that suppliers have adequate disaster awareness in place. That visibility must also extend into supply chain sub-tiers. Manufacturers should maintain an up-to-date catalogue of supply chain factory sites so they can rapidly identify critical suppliers operating in a disaster-affected region. This enables a fast transition from damage assessment to triage, creating more options for safeguarding supply and securing limited alternatives before competitors do.

It takes several months for supply chains to fully recover from major shocks such as the Japan earthquake. During the recovery period, a damaged supply chain is at heightened risk from additional events that might not otherwise cause supply chain failure, underscoring the urgent need for improved supply chain risk management (Brennan, 2011).

References

Buerk, Roland. (2011). Japan earthquake: Tsunami hits north-east. BBC. 11 March.

Brennan, Patrick. (2011). Lessons learned from the Japan earthquake. Disaster Recovery Journal, Summer, Volume 24, Issue 3. Retrieved November 27, 2011, from http://www.drj.com/2011-articles/summer-2011-volume-24-issue-3/lessons-learned-from-the-japan-earthquake.html

Fluchter, Winfried. (2003). Tokyo before the next earthquake: Agglomeration-related risks, town planning and disaster prevention. The Town Planning Review, Vol. 74.

Milliken, Alan L. (2011). Using exception management to improve the demand forecast. The Journal of Business Forecasting, Vol. 30.

Rowinski, Dan. (2011, March 14). Japan quake disrupts world technology supply chain. GCN — Government Computer News. Retrieved November 27, 2011, from http://gcn.com/articles/2011/03/14/japan-quake-disrupts-world-technology-supply-chain.aspx

Sirkin, Harold L. (2011, April 1). Globality: Why were we unprepared for Japan? Making supply chains more flexible is the key to minimizing a disaster's aftershock. Bloomberg BusinessWeek. Retrieved November 27, 2011, from http://www.businessweek.com/managing/content/mar2011/ca20110331_329432.htm