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OM in the News: Planning for Japan’s Next Earthquake–The Really Big One

May 21, 2016

earthquakeA huge earthquake in the Japan’s industrial heartland — costing as much as 40% of GDP and disrupting supply chains at companies such as Toyota — is seen as inevitable, reports The Financial Times (May 19, 2016). Understanding the risk and reducing damage is critical (as we discuss in Supplement 11). The recent magnitude 7.3 earthquake in Kyushu, which killed 49 and destroyed thousands of homes, is a reminder that Japan remains exposed to frequent natural disasters. But a big earthquake directly below Tokyo, in the Nankai Trough, would be an economic shock of global significance. The government puts the odds of a magnitude 8.0-plus Tokyo earthquake at 50% in the next 20 years, 70% in the next 30 years and 90% in the next 50!

A Tokyo region earthquake could be more devastating than the one in 2011 at Tohoku, which left 18,800 dead, thousands homeless and crippled the Fukushima nuclear facility. The global impact of the Tohoku earthquake surprised many. Car plants as far afield as Louisiana and Ohio had to halt production for a lack of parts, from microcontrollers to paint.

Yet Tohoku is on the periphery. Tokyo is a manufacturing heartland, a link in some of the world’s most important supply chains. Fanuc, the world’s leading maker of industrial robots, is based in the region, as are 1/2 the world’s musical instruments (manufactured by Yamaha and Roland), and 1/3 of the world’s Nand Flash memory (by Toshiba), built into every smartphone. But even in this region, two supply chains stand out: it is home to Toyota (which makes 1.6 million vehicles a year there) and to most of Boeing’s Japanese suppliers (which make the 777 and 787 fuselages).

Japanese business learned a lot from the Tohoku disaster. Companies changed their supply chain systems to increase redundancy and have extensive continuity plans. However, even if Toyota’s own plants managed to restart quickly, they are only as resilient as their weakest subcontractors and the regional infrastructure of roadway, ports, and airports.

Classroom discussion questions:

  1. What can firms like Boeing do to protect their fuselage supply chain?
  2. What models in Supplement 11 can be used to deal with this problem?
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