Natural Disasters and Their Effect on the Supply Chain
Throughout historical evolution, disasters have been observed as major limitations to the activities of businesses; hence, there is the need to examine the effects they pose to the supply chain and come up with probable solutions. The international networks linking “manufacturing, handling, and distributing of a certain product” (Ye & Abe, 2012) are supposed to provide customers with goods constantly, without interruption in the supply or various stages of production. However, nowadays, natural disasters, which cannot be controlled or avoided, are one of the main causes disturbing the aforementioned process. Global supply chains’ disruptions caused by cataclysms can be minimized if different suppliers would not be concentrated in one region majorly. Well-thought organization’s management policy regarding preventing natural disasters and quick response in dealing with consequences of those are able to solve the issue in the shortest terms. After an in-depth analysis of topical literature had been conducted, recommendations for disaster preparedness in supplied chains were found by the researcher. In addition, a detailed explanation how these approaches can be improved both scientifically and practically was given (Hale & Moberg, 2005, p. 195). Moreover, generalization of the explored literature enables a possibility of composing a proposal for businesses for creating an effective and efficient global companies’ anti-disaster performance model.
Keywords: global supply chains, natural disasters, disruption, global companies’ anti-disaster performance model
Natural Disasters and Their Effect on the Supply Chain
Global supply chain is a multisided subject, which is the field of interest of different scholars throughout the world. It involves an adjusted interaction of numerous manufacturers, handlers, and distributors of certain products located worldwide. The functioning of this network is directed on the satisfaction of customers’ purchasing needs. The issue can be researched in many aspects. However, global supply chains’ disruption caused by natural disasters is one of the most interesting and pressing ones. The impacts of cataclysms into not only local, but also international businesses’ operating are considerable. Those influences did not disappear with the appearance of innovations in technologies or the rapid development of various operational systems on the manufactures. On the contrary, the above processes have made the problem acuter, and one need to be addressed in the shortest terms. In recent years, many natural disasters have shocked the world in general and its industrial part in particular. For instance, the Great East Japan earthquake, severe floods in several South-East Asian countries, Hurricane Sandy – are only few examples of 2011-2012 period among many others, which affected global supply chains significantly. Those events suspended activities of some enterprises, whereas numerous ones stopped their existence at all leading to inconveniences for their buyers. Therefore, this issue is of great concern for both management and researchers. This matter will be studied in the paper. Moreover, such components of this problem as definitions and illustrations of the issue, alternate policies proposed by different scholars and companies, and the set of recommendations for minimizing those impacts will be paid the most attention to.
Consequently, throughout historical evolution, disasters have been observed as major limitations to the activities of businesses; hence, there is the need to examine the effects they pose to the supply chain and come up with probable solutions.
A Background of the Problem
Today’s business environment can be described as a well-established structure composed of various interrelated parts widespread globally. Interaction of these components in the business system is supported through the supply chain process. The latter is a network of cooperation among different companies concerning manufacturing, handling, and distributing a certain product. Because of rapid and unstoppable globalization, supply chains became not only regional or national, but a global phenomenon. Thus, the aforementioned processes providing the supplying customers with goods and services involve a well-organized interaction of different enterprises of any particular manufacturing sphere located in various parts of the world. Nevertheless, under certain circumstances, the functioning of such complex structures can be disturbed. Natural disasters are among the risks for the process since their occurrence is a cause to dysfunction or shortage producing goods resulting in losses to enterprises as well as inconveniences for the customers.
Hence, throughout the long-term development and technological evolution various industries have created the tightly linked global supply chains. These links ensure products’ supply, manufacture, and distribution across the boundaries of different countries applying offshore as well as outsourcing models. The supply chain mechanism can be shown, for instance, on the example of one of the leading global automobile producer – Toyota. This corporation carries out its business activities in 26 states and regions around the world and has 50 manufactures overseas. As of 2011, Toyota’s vehicles from these production bases were supplied to more than 170 countries and regions (qtd. in Ye & Abe, 2012, p. 6). The Figure 1 below demonstrates the complex and interrelated global supply chain of the company. However, the performance of the latter was influenced greatly after the Great East Japan earthquake of 2011. More specifically, Toyota had to stop functioning of all its producing centers in the U.S. since of parts shortages losing not just enormous amounts of money, but also one’s status of number one car maker.
Moreover, if to trace the recent history, it becomes evident that natural hazards lead to irreparable consequences in many aspects of society’s existence. For example, statistics compiled by the Center for Research on the Epidemiology of Disasters (CRED) confirm the above statement:
During 2010, there were 373 natural disasters worldwide that claimed over 296,800 lives and affected some 208 million people. It is estimated that costs related to these events approached $110 billion. . . . The January earthquake in Haiti accounted for more than 75% of all disaster-related deaths last year. The most costly single event also occurred in this region: loses from the 8.8 earthquake in Chile in February 2010 amounted to $30 billion (“CRED Provides Valuable Information,” 2011).
Furthermore, the losses of humankind in terms of cataclysms are measured by supply chains’ disruptions.
Therefore, cataclysms in the nature make a huge impact on both human lives and various activities, including ones that are directed on satisfaction of their consuming needs resulting into profits for companies, which provide them with goods and services. Hence, studying effects of natural disasters on the supply chains is a quite acute and topical problem that has to be addressed immediately. Thus, this aspect of the global organizational management structure is of great importance for exploration.
Natural Disasters’ Impacts on the Supply Chain: Illustrative Material
The considered issue is extremely significant for successful organizations’ performance worldwide. The global supply-chain structure can be easily damaged by natural disasters. The above situation can be caused by the ruining and uncontrollable force of the latter and unpreparedness of the former. This chapter will illustrate effects that natural hazards may have on the supply chains.
The first example to be analyzed is the Great East Japan earthquake which occurred on March 11, 2011. The event shocked the northeastern part of the country and, in addition, disaster’s impacts were multiplied by a tsunami following afterward. These occurrences led to either domestic or worldwide effects in terms of global supply chains. Overall, the country’s economic losses were measured by sum $210 billion – 3.8 percent of Japan GDP. What is more, this cataclysm influenced the global supply chain of the automobile industry for about three months (Ye & Abe, 201, p. 13). Numerous manufacturers, as well as their clients, had to change suppliers that were too affected because of the earthquake or even closed down by the occurrence of the earthquake and tsunami. Besides, as Fisher (2011) indicates:
About 22 percent of the world’s 300 mm silicon wafer supply came from the Shin-Etsu Handotai’s Shirakawa plant in Fukushima prefecture, and 60 percent of critical auto parts were in the same area. The region is also a primary supplier of lithium battery chemicals, flash memory, and anisotropic conductive film used in LCD flat panel displays.
Consequently, the aforementioned participants of the global supply-chain process and consumers, as a result, have been impacted by the natural disaster.
Another recent catastrophe, which caused huge damages to the worldwide supply-chain system, has been severe floods in several South-East Asian countries, the Sindh region of Pakistan, and Thailand in 2011. As a result, not only those nations, but also other states involved with them into the global supply chain have been impacted. For example, Thailand, in accordance with Ye and Abe’s research, is the world’s largest producer of hard disk drivers (HDD) after China and is a major supplier of HDD parts for such HDD producers as Western Digital, Seagate, Toshiba and Hitachi (2012, p. 16). Because of the floods, the world net of HDD industry survived the three-year downturn and great increase of the prices on this production.
One more horrific event that has led to serious disruptions in terms of global supply chains has been Hurricane Sandy, which happened October 25, 2012. It resulted to great destruction along the U.S. northern seaboard crippling effects on local as well as global business. This occurrence impacted the U.S. auto industry greatly. Additionally, it caused harm to lots of properties and facilities necessary to functioning of different manufactures.
Those were only few examples proving the importance of addressing the studied issue. However, they are too noticeable and make many concerns regarding the necessity of improvement of this sphere.
Scientific Approach to Addressing the Issue
According to the research conducted by Hale and Moberg (2005), “As firms begin to pay more attention to supply chain security and the development of comprehensive disaster management process, little help can be found in the logistics and supply chain management literature” (p. 196). Moreover, not only different links in supply chains, but also ones of different industries and specifics of their functioning have to be taken into consideration when to address the studied in the paper issue. Marcus and Loebbecke (2013) analyzing preparedness and strategies toward the studied problem applied in the digital industry emphasize, “Companies in an ecosystem include not just customers and suppliers, but also, for example, producers of complementary products and services, logistics providers, outsourcers, and financiers” (p. 650). Additionally, as by Swoboda and Elsner (2013) conclude, “Retailers respond to uncertain environments in distant countries via greater adaptation, especially with regard to peripheral format elements” (p. 96). The latter involve distribution logistics for stores, warehouse management, cross-docking processes among others. The research by Vasiliu and Dobrea (2012) considers theoretical approach of addressing the problem in terms of the electronic industry. The scholars analyze three management strategies – lean, agile, and leagile ones – that could be implemented for assuring flexibility and successful operation of all components of this industry to minimize cataclysms’ effects on its supply chains.
Therefore, the systematic approach needs to be followed while studying and addressing the issue in general.
Scientific alternatives are a significant factor for the problem-solving process. Thus, scholars explore this area of study intensively to aid numerous multi-specialized organizations and industries in solving this problem. For example, Federal Emergency Management Association (FEMA) in Emergency Management Guide for Business and Industry of 2002 proposed, “All firms should store critical documents, emergency supplies and equipment, satellite phones, medical equipment, water, clean-up supplies, portable lights, inventory and equipment records, and generators, in a safe and secure location” (qtd. in Hale & Moberg, 2005, p. 196). Nevertheless, implementing such a methodic may be either too costly or not providing a quick response in case of emergency since some disasters can destroy the emergency facilities. As cited in Hale and Moberg (2005), the study conducted by Joseph and Couturier showed seven management options that could be implemented for assuring disaster strategies efficiency. They emphasized the necessity for arranging a common with outside companies and organizations agreements and establishing contingency plans concerning every component of the natural hazard’s process. Moreover, in December 2001, the Center for Supply Chain Research at Penn State University funded a supply chain contingency workshop, which considered emergency management strategies and their implementation on the examples of such firms as UPS, Boeing, Toyota, USPS, General Motors, Ford, and Oracle. Besides, Helferich and Cook, being supported by the Council of Logistic Management, conducted a prominent research of the issue in terms of disaster planning and emergence response to it. This exploration provided a detailed overview of sources that can be used by the companies’ management for creating their individual plan-responses as for natural disaster occurrence as Figure 2 below demonstrates (Hales & Moberg, 2005, p. 201).
Figure 2. Adaptation of Proposals by Helferich and CookTherefore, various scholars study the issue actively though not all components of the problem and its solving are considered, as well as some shortcomings limit the researches. Thus, as Manuj and Mezner (2008) claim, only integrating literature from several disciplines – including logistics, supply chain management, operations management, strategy, and international business among others – can develop a model of global supply chain risk management. Solving the Problem in the Management PerspectiveIn the management perspective, all aspects of the issue, as well as certain shortcomings made by researchers in this area, have to be taken into account for maintaining an effective contingency planning for minimizing the disasters’ impacts on the supply-chain system worldwide. Measures to be taken to overcome the cataclysms’ obstacles are pre-disaster and post-disaster ones. What is more, the condition as “to prevent a disaster ruining effects rather than fight with them” has to be one of the leading principles toward the problem-solving process. This obstacle is one of the major ones, and scholars like Ye and Abe (2012) confirm this fact emphasizing “facilitating of disaster risk reduction measures, such as helping with preparedness and promoting disaster insurance coverage” (p. 19). However, the speed of the recovery process after the natural hazard occurrence as a post-disaster measure is an extremely important aspect of companies’ effective performance, as well. Therefore, enterprises as global supply-chain systems need to establish such anti-disaster models for their efficient functioning as:1) Find a balance between efficiency and risk; specifically do not concentrate sourcing of the production process from one supplier. This condition can be assured by the following components:
- raising production flexibility to cater to the volatile nature of the market;
- selecting suppliers on the basis of risk criteria rather than pure cost minimization;
- shortening the supply chain and increasing its visibility;
- diversifying risks by using different distribution channels and suppliers;
- enhancing relationships with other supply chain partners (qtd. in Ye & Abe, 2012, p. 18).
2) Invest in long-term continuity. This circumstance involves (a) a correct assessment of organization’s vulnerability toward different types of natural hazards; (b) maintenance of risk transfer; (c) contingency financing and minimizing strategies; (d) cooperation with insurance companies. Furthermore, as noted by Hale and Moberg (2005), to ensure firms’ preparedness to possible natural disasters’ occurrences through the minimal number of emergency resource locations, the next steps have to be taken: 1. The emergency resources necessary for each secure location have to be identified.2. All critical facilities within supply-chain system need to be determined, specifically – the communication between all firms in the supply chain has to be supported in the high level to assure awareness of forecasting in disaster-prone areas.3. Maximum response time goals for access to emergency resources and minimum distances secure site storage areas must be placed from supply chain facilities must be set.4. The proposed decision model to identify the number and approximate location of disaster shortage facilities have to be put in practice (pp. 201-202). Consequently, the proposed joint strategy should be applied and followed by supply-chain management for creation an effective and efficient global companies’ anti-disaster performance model. ConclusionThe effects posed by natural disasters into the functioning of global supply chains were the subject of analysis in the paper. In summary, cataclysms have always been and still remain among the most influential factors limiting global businesses’ activities. The research traced few bright examples illustrating the studied subject. These occurrences led to either domestic or worldwide impacts in terms of global supply chains (Ye & Abe, 2012, p. 3).The above issue is an acute problem, which cannot be erased by neither the historical flow of time nor modern high-leveled technological progress. The problem can be addressed by the complex approach only that would have been theorized and proposed by researches and performed by international suppliers worldwide. The existing management strategies toward natural disasters’ impacts on the global supply chains have to be reviewed. What is more, an improved approach for the problem solving should be implemented. Additionally, different scientific institutions compound important researches of the studied matter as well as trainings for the managers of organizations aimed at addressing the issue.Generalization of the explored literature enables a possibility of composing a proposal for businesses for creating an effective and efficient global companies’ anti-disaster performance model. Thus, the following components of such strategy have to be taken into consideration:
- “Pre-disaster” forecasting and appropriate preventing measures of minimizing their effects ought to be maintained.
- The supply chain is supposed to be flexible in terms of supplies and transportation.
- Management of the organization always has to be aware of forecasting in disaster-prone areas.
- The vital aspect is a contingency planning of dissolving such occurrences, as well as the emergency locations facilities in the structure of the latter.
Therefore, only integrated approach of both scholars and management controlling global supply chains’ operation can be effective in the analyzed problem-solving process. Such strategy can assure loyal customers for businesses as well as two-sided satisfaction of this cooperation.