Global supply chains are crucial to low-cost, high-productivity manufacturing. Because of their importance, treasurers have focused attention of financial issues like supply chain finance and optimization. But according to a new research paper, more international cooperation is required too keep these supply chains from becoming significant vectors of contagion that spread the impact of global catastrophes throughout the manufacturing world.
Masahisa Fujita, professor at Konan University and adjunct professor at the Institute of Economic Research at Kyoto University, studied the effects of the earthquake and tsunami in Japan in the spring of 2011 and the floods in Thailand in September of that year. He examined the effects of the two events by examining production data from Japan, the Guangdong region of China and the US.
In the paper (The lessons from the Great East Japan Earthquake and the Great Floods in Thailand), Fujita writes that after the earthquake, auto production fell to 85.7 percent in March, recovered somewhat, then fell again after the Thailand floods. Auto production fell 39 percent in Guangdong in April, revived and fell again in September. In the US, the drop in production did not come until July. Fujita attributes the difference in timing to the fact that companies in countries that are farther from a production center tend to hold more inventory stock.
Fujita argues that, to enhance the resiliency of the global supply chain, cooperation among competing suppliers is essential in times of crisis. “There are many ways in which individual enterprises can enhance risk management, such as through the virtual and actual dispersion of key plants, standardization of parts and materials, diversification of supplies, and utilization of disaster insurance.”
He points to the Thai government’s plan to develop “sister industrial clusters” as one example of how to mitigate supply chain risk. The government proposes that during normal times, each production cluster will focus on its own products. But when disaster strikes a region, its sister cluster would step in to provide production of common parts. “While we compete with each other during normal times, we should cooperate in times of disasters,” Fujita writes.
“International cooperation is essential, as is cooperation on innovation toward upgrading our brainpower networks,” Fujita writes. “The lessons of Japan and Thailand are that we should work to move the supply chain toward greater safety.”