C. Warren Axelrod

Long-Term Impact of Catastrophic Events

“Out of sight, out of mind.” So it is with many aspects of life. We forget sometimes that recovery from major catastrophes can take a very long time. It shouldn’t be surprising, therefore, to learn that the aftermath of the March 11, 2011 tsunami that hit northern Japan continues to affect supply chains almost three years later. But it does.

The article that caught me by surprise was in, of all places, the December 9, 2013 issue of Autoweek. Written by Andrew Stoy and Mark Vaughn, the short piece has the title, “Tokyo Fights Back: Japanese Automakers Try to Overcome Effect of Tsunami,” the article states the following:

“We were a bit surprised  … when each speaker [at the Japan Auto Manufacturers Association conference] started his talk reminding us of the March 11, 2011 earthquake and tsunami. We in the West might have forgotten the devastation and industrial disruption following those natural disasters, but it is something with which the Japanese automakers still struggle.”

Who would have thought that there are still supply-chain issues resulting from this event? Granted it was a major disaster, but one would have thought that the issues could have been resolved within a three-year period. Apparently not. This revelation has some serious implications for the usual SCRM (supply-chain risk management) analysis. It suggests that analysts may not put enough weight put on the long-term negative consequences of catastrophic events. If they had, one might expect much more to have been done in terms of out-of-region redundancy and backup.

The U.S. banking regulators require that core financial institutions have out-of-region backup for both business functions and IT systems and networks. This is because failure of financial institutions to do so would pile enormous systemic risk onto the banking and finance sector.

Perhaps auto manufacturing is different in that there are many global competitors willing to take up the slack if some of them are subjected to significant capacity losses. Still, the view is surely very different for those companies that were directly affected by the disaster. This is yet another example of how low-probability high-impact situations (the proverbial “black swans”) are not realistically evaluated. If they had been, there might not have been so much reliance upon a single region by the auto manufacturers.

There are certainly lessons to be learned by risk professionals from these revelations when it comes to ensuring that long-term effects have been adequately included in their analyses.

 

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