Disasters expose flaws in assumptions about globalization

By Alistair Gray
19 March 2012 Just days after a powerful offshore earthquake sent a wall of seawater surging towards Japan’s north-eastern coastline, devastating the region, companies with operations thousands of miles away were left grappling with shortages of critical components. A year ago this week, as rolling blackouts forced parts plants throughout the world’s third-largest economy to shut down, companies large and small from Poland to Canada idled production lines. The carmakers General Motors, Ford and Honda, as well as technology hardware groups such as Sony, endured some of the most painful supply chain headaches. The disaster in Japan was only one of several during a year that became, in absolute terms, the costliest ever for natural catastrophes – highlighting the vulnerabilities of a complex global supply chain system that has developed over decades. “Companies have taken more and more aggressive positions on reducing cost,” says John Hurrell, chief executive of Airmic, an association of company risk managers. As a result, he adds, many have “drifted into streamlined production without really taking that decision as a decision. Before the wake up call last year, they had moved very comfortably into this”. Tom Teixeira at Willis, the insurance broker, says companies in some industries “thought they were sophisticated. They thought they knew what their exposure was. What’s become quite clear is that they got it wrong”. Just four months after the Japanese earthquake, tsunami and nuclear crisis, heavy rains in Thailand – a global hub for the same car and electronics industries – started the nation’s worst flooding in a half century, causing even bigger output snags. Together with earthquakes in New Zealand and a violent tornado season in the US midwest, they took global economic losses to about $380bn, according to the reinsurer Munich Re. Of this, the insurance industry absorbed little more than a quarter. The series of devastating events raises the question of the extent to which companies have reassessed their resilience to such shocks. The worry is that rather than spreading risks across different regions, today’s bewilderingly complex supply chain structures have left entire industries vulnerable to difficulties at any one particular point as companies tend to source via the same routes. […]

Disasters expose flaws in assumptions