Case Study 8
MGT 492 – Case Study Assignment 8 questions.
1. What were the effects of the earthquake and tsunami in Japan upon the operations of TRQSS?
2. What strategies could Toyota and TRQSS (or any other supplier) employ to improve supply chain resiliency?
3. How does the existence and utilization of temporary workers affect the ethical behavior of the organization? How might this be addressed?
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Ye, Linghe; Abe, Masato
The impacts of natural disasters on global supply
ARTNeT Working Paper Series, No. 115
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Asia-Pacific Research and Training Network on Trade (ARTNeT),
Suggested Citation: Ye, Linghe; Abe, Masato (2012) : The impacts of natural disasters on global
supply chains, ARTNeT Working Paper Series, No. 115, Asia-Pacific Research and Training
Network on Trade (ARTNeT), Bangkok
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The impacts of natural disasters
on global supply chains
By Linghe Ye and Masato Abe
ARTNeT Working Paper Series No. 115/June 2012
ARTNeT Working Paper Series
and Training Network on Trade
The ARTNeT Working Paper Series disseminates the findings of work in progress to
encourage the exchange of ideas about trade issues. An objective of the series is to get the
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ARTNeT members, partners or authors employers.
ARTNeT Working Paper Series
No. 115/June 2012
The impacts of natural disasters
on global supply chains
By Linghe Ye and Masato Abe*
*Linghe Ye is a consultant and Masato Abe is an Economic Affairs Officer in the Private Sector and
Development Section of the Trade and Investment Division of the United Nations Economic and Social
Commission for Asia and the Pacific in Bangkok. The technical support of the ARTNeT Secretariat is
gratefully acknowledged. Diana Dai edited the manuscript and the copy-editing was by Ellie Meleisea.
The views expressed herein are those of the authors and do not necessarily reflect the views of the United
Nations. It is acknowledged that Marc Proksch, Pisit Puapan, Heini Amanda Salonen, Shaina Hasan and
Yoko Ono provided very useful inputs and comments to this paper. Any remaining errors are the
responsibility of the authors, who can be contacted at tel: +6692881483, fax: +6622881027 email:
Please cite this paper as:
Ye, Linghe and Masato Abe, 2012. The impacts of natural disasters on global supply chains.
ARTNeT Working Paper no. 115, June, Bangkok, ESCAP. Available from www.artnetontrade.org.
Table of contents
1. Introduction ……………………………………………………………………………………………………………………….6
2. Development of global supply chains …………………………………………………………………………………6
3. Supply chain disruptions and increasing risks……………………………………………………………………..9
4. Case studies: Japan earthquake and Thailand floods ………………………………………………………….11
5. Policy options to enhance disaster resilience ……………………………………………………………………..18
List of Tables
Table 1. Losses for earthquake damages in 2011, Renesas Electronic Corp …………………………..12
Table 2. The impact of the Thai 2011 Floods on Japanese enterprises……………………………………15
List of Figures
Figure 1. Overseas production network of Toyota…………………………………………………………………..7
Figure 2. Comparison of national and global supply chains …………………………………………………….8
Figure 3. Disaster impact spill-over from the Great East Japan earthquake…………………………….13
Figure 4. Disaster impact of the Southeast Asian floods on Japans manufacturing sector………16
Figure 5. The price history of two HDD products………………………………………………………………….17
APEC Asia-Pacific Economic Cooperation
ASEAN Association of Southeast Asian Nations
FDI Foreign Direct Investment
GDP Gross Domestic Product
HDD Hard Disk Drive
ICT Information and Communication Technology
JCCB Japan Chamber of Commerce Bangkok
JETRO Japan External Trade Organization
M&A Mergers and Acquisitions
MNC Multinational Corporation
ODI Overseas Development Institute
OECD Organisation for Economic Co-operation and Development
R & D Research and Development
SMEs Small and Medium-sized Enterprises
THB Thai Baht
TISN Trusted Information Sharing Network
TNC Transnational Corporation
UNESCAP United Nations Economic and Social Commission for Asia and the Pacific
USD United States Dollars
Globalization has transformed business environments worldwide, including in the Asia-
Pacific region. The fast expansion of global supply chains (typically comprised of firms,
suppliers, distribution links and labour), which are cross-border business and production
networks, allows firms to allocate scarce resources more efficiently than ever before. The
advancement of information and communication technology (ICT), the development of
international logistics systems and the reduction of trade barriers have all facilitated the
integration of economies through the web of global supply chains. Recent disasters in
Japan and Thailand demonstrate, however, that the development of global supply chains
have also changed the risk profile of business and could potentially increase economic
vulnerability in Asia and the Pacific through higher direct and indirect disaster risks.
This paper explores how global supply chains expand the risks of natural
disasters and how natural disasters affect supply chain operations in the Asia-Pacific
context. The paper will first discuss the emergence and development of global supply
chains in the Asia-Pacific region and will then examine how these new developments
globalize disaster risks and bring extra vulnerability to businesses, particularly to their
production networks. Following this, the paper will describe the impact of natural
disasters on the global supply chains, on the basis of two natural disasters that occurred
in 2011 in the region: the Great East Japan earthquake and the South-East Asian floods
(focusing on the flood of Thailand). Finally, policy options are proposed to enhance
disaster resilience for business in the context of globalization.
2. Development of global supply chains
Driven by trade and investment liberalization and continued cost reduction pressures
from customers, businesses have been extending worldwide to make the most of each
locations comparative advantage. Many industries have adopted highly integrated
global supply chains in which products are supplied, manufactured and distributed
across national boundaries through offshore activities and outsourcing strategies. At the
same time, economies of scale have driven the consolidation and agglomeration of firms
in the supply chains, which have also promoted logistic consolidation. As a result,
supply chains are becoming more complex with wider geographical coverage, which has
increased the invisibility of the supply chains.
Offshore activities refer to activities that utilize facilities located in a country
other than where the enterprise is based (incorporated) and can include production,
service and sourcing (Vitasek, 2006). The motivation for offshore activities has
primarily been cost, including lower labour, setup and ongoing costs, higher cost
efficiency with larger production scale, and possibly lower financial costs such as
borrowing costs and tax rates. An example of offshore activities is the overseas
production network of Toyota. As shown in Figure 1, Toyota conducts its business in 26
countries and regions, with 50 overseas manufacturing operations. As of 2011, Toyota’s
vehicles from these production bases were supplied to more than 170 countries and
regions (Toyota, 2012).
Figure 1. Overseas production network of Toyota
Source: Toyota, 2012
Outsourcing represents one of the greatest changes to global business practices.
Today, firms do not just procure materials and parts from overseas suppliers, but also
outsource various functions such as product design and logistics services (e.g. turnkey
products1 and third-party warehousing) that were conventionally provided in-house. The
logic behind this trend is that outsourcing can enable firms to focus on their core value
added activities, where they have a distinct advantage. Overall efficiency increases
because each firm in the supply chain can maximise its competitive advantage through
strategically focused resource allocation (Christopher, 2011). Consequently, the supply
chain becomes a web involving multi-tier suppliers and service providers. Focal firms2
are at the centre of an international production network (global supply chain), linked
with several interrelated but independent entities.
As a result of outsourcing, to take advantage of the lower costs in each location
as well as to penetrate untouched foreign markets, supply chains have been extended
from one side of the globe to the other (Christopher, 2011). As described in
fragmentation theory, a whole production process is now split into separate nodes in
different locations (Jones and Kierzkowski, 1990). These production nodes are
connected by distribution links, which refer to activities coordinating the operation
between these nodes such as administration, transportation, warehousing and financing
among participating firms (Jones and Kierzkowski, 1990). The final products are
produced across the borders and then sold beyond the borders to consumers worldwide.
Unlike a local (national) supply chain, a global supply chain involves transporting large
amounts of supplies across long distances, which increases the frequency of using multi-
modal distribution facilities. Figure 2 illustrates national and cross-border supply chains.
1 A turnkey product or service is one that is installed fully complete and ready for a user to operate. The
term implies that the user just has to turn a key and start using the product or service (TechTarget, 2002).
2 A focal firm is the initiator of an international business transaction, which conceives designs and
produces goods or services (Cavusgil, Knight and Riesenberger, 2008).
Figure 2. Comparison of national and global supply chains
Another prevailing trend is supplier consolidation, which refers to the reduction
by firms of their total number of suppliers while increasing business with individual
suppliers (EIU, 2005). In some cases this corporate strategy has been extended to single
sourcing whereby one supplier would supply one business input (e.g. a part, component
or module). With this strategy, focal firms aim to build strong partnerships with their
suppliers and achieve price advantages from the economies of scale and bargaining
power while utilizing suppliers expertise in research and development (R&D), design,
production and distribution. It also lowers transaction costs, with fewer orders to be
managed by the focal firms. An example of supplier consolidation can be seen in the
automobile industry, in which the number of automotive parts suppliers dropped from
over 30,000 in 1998 to around 4,500 in 2008 (KPMG, 2009). Mergers and acquisitions
(M&A) among major suppliers have facilitated supplier consolidation.
A similar trend is production agglomeration, which refers to the geographical
concentration of production facilities and activities (cf. Healey and Ilbery, 1990). Firms in
the same industry tend to locate themselves very close to one another, leading to
geographical concentration of the industry. The producers of substitutable products locate
in close proximity to each other so as to reduce production costs. Production
agglomeration is also driven by economies of scale. Agglomeration in a particular location
is also generally related to accessibility to natural resources (such as petroleum or sunny
weather) or other resources (such as low cost labour) or because of favourable business
conditions in that location. This process also enhances cooperation between firms (e.g.
development of industrial clusters and estates). Supplier consolidation and production
agglomeration have also increased the importance of certain production bases in the
supply chain, which provide necessary supplies and business and logistics related services.
In order to be close to transportation and logistics facilities and to lower transport costs,
production centres are often established and developed in coastal areas and river basins
with high population concentrations (Clay and Benson, 2005). The benefits derived from
production agglomeration include knowledge spill-over, labour market pooling, input
sharing and lower product shipping costs (Rosenthal and Strange, 2001).
Another trend is logistics consolidation, which refers to the combination of two
or more shipments in order to realize lower transportation costs. For example, inputs and
components from a number of suppliers for one production site can be combined into a
single delivery rather than each supplier delivering small quantities separately. This
enables the suppliers to share the costs of transportation, warehousing and administration.
This trend has been accompanied by the emergence of third-party distribution and
logistics firms, including various turnkey service providers specializing in providing an
in-bound consolidation service (Christopher, 2011). The expansion of the global supply
chains combined with logistics consolidation has also increased the dependence of
distribution links on selected international distribution facilities including transport
infrastructure, logistics systems and communication infrastructure.
While streamlining production networks, supplier consolidation and production
agglomeration have increased the importance of certain suppliers and locations by
concentrating physical assets and production facilities, the structure of the supply chains
is becoming more complex, with more individual production nodes and distribution links
involved across borders. Consequently, it has become more difficult for focal firms to
identify the risks in the supply chain.
3. Supply chain disruptions and increasing risks
A supply chain disruption is defined as a major breakdown in a production node or a
distribution link that is part of a supply chain. Natural disasters are one cause of
disruptions to supply chains. They usually result in widespread damage to several firms
and facilities at the same time. This has a severe impact on an industry and significant
time is often required for recovery from natural disasters.
With the globalization of supply chains, the exposure of firms to risks of
disasters has been expanded across national borders as a natural disaster in one
geographical location can also affect firms in other locations. Furthermore, with offshore
and outsourcing activities, the level of interdependence among firms has increased,
which has increased vulnerability because disruption of even one part of the global
supply chain can result in operational failure of the other parts. Though the focal firm
may be able to recognize some disaster-prone nodes or links within the supply chain,
fragmented production has reduced the degree of control and monitoring of the focal
firm over production nodes and distribution links (Kimura and Ando, 2005).
At the same time, with supplier consolidation and production agglomeration and
consequent high density of production assets and economic activities in certain locations,
the risks have been centralized in those locations. When disasters affect areas where
production facilities are concentrated (particularly those located in areas vulnerable to
storms and flooding, such as coastal areas or areas close to rivers), supply chains are
disrupted, which results in significant structural losses to the whole production network
and even to related industries. During the disaster and recovery period, other firms in the
supply chain may encounter difficulties in finding proper substitute suppliers or customers
elsewhere, making the impact of the disaster last longer. Furthermore, dependence on
international distribution facilities has increased vulnerability to disaster as damage to
these facilities can easily lead to supply chain disruption.
Some widely adopted supply chain management strategies also increase the risks
of problems in situations of natural disasters. Examples include the just-in-time
practice and lean supply chain management, which require more frequent deliveries of
supplies, minimizing the non-value-added time and inventory. These efficiency
maximization models in business increase the level of interdependence between firms
and correspondingly raise the chances of a supply chain disruption. Also, the
compression of non-value-added time in inventory transfer and storage may remove the
essential risk buffer between the production nodes and deepen the negative impact when
natural hazards occur in the global supply chain. For example, when a disaster hits a
supplier or a distribution link and disrupts the supply chain, the focal firm that adopts
just-in-time practices will suddenly encounter production suspension due to supply
shortages and the negative effect will transmit quickly to the downstream supply chain.
In addition to the loss due to direct damage and recovery cost, natural disasters
may cause cash flow problems among participating firms if the partners in the supply
chain cannot settle their payables in time, and thus pose threats to the financial situation of
a firm. Negative financial outlooks may raise the concerns of financial institutions and
pose obstacles for firms in obtaining external financial resources during the recovery phase.
If the firm is publicly traded, a supply chain disruption may negatively impact their
reputation and cause underperformance in the market (Hendricks and Singhal, 2005).
Financial institutions can also be affected by disruptions to the supply chain caused by
natural disasters. In addition to losses in the insurance industry, financial difficulties of client
firms caused by disasters and the subsequent supply chain disruptions may create unexpected
problems in the repayment of loans and in turn undermine the stability of financial institutions.
An increasing number of small and medium-sized enterprises (SMEs) are
involved in global supply chains. SMEs are generally suppliers of labour-intensive parts
and components or providers of other basic services, usually on a subcontracting basis
(Abe, 2012). Larger partners in the global supply chain often take advantage of the
greater flexibility of SMEs and their adaptability to local economic conditions and
capacity to serve orders for smaller quantities, but SMEs have been identified as a highly
disaster-vulnerable group in the supply chain. The small market share and weak
bargaining power of individual SMEs places them in a disadvantaged position in
negotiations with supply chain partners to obtain resources and support to deal with the
impact of disasters. Lack of output diversification also limits the ability of SMEs to cope
with supply and demand shocks and market volatility generated by disasters. Studies
have revealed that few SMEs are adequately prepared for natural hazards.3 SMEs have
3 cf. Alesch et al. 2001; Wedawatta, Ingirige and Amaratunga, 2010
been identified as the top sector of underinsurance, and they usually do not conduct risk
assessments or implement business continuity plans (CERNO, 2010; CII, 2009). This
lack of preparation consequently increases the difficulty of recovery from disasters and
the subsequent supply chain disruptions (Wedawatta et al., 2010).
4. Case studies: Japan earthquake and Thailand floods
The natural disasters that hit Japan and Thailand in 2011 were among most devastating
in the Asia-Pacific region in recent history. In March 2011, a massive earthquake
(known now as the Great East Japan earthquake) hit the northeast part of Japan and was
followed by devastating tsunami. Then, in late 2011, floods in Thailand caused huge
damage to the country. Given the important positions of Japan and Thailand in the
global supply chains for many economic sectors, the two disasters caused large
disruptions both domestically and worldwide, thus highlighting the interconnected
nature of world markets and economies.
The two cases highlight the different types of impacts of natural disasters on the
global supply chain. Japan not only acts as a major supplier in many industries (e.g.
automotive parts, chemicals, electronic parts and steel) but also as a producer of end
products to the mass market. As a result, the Great East Japan earthquake impacted both
upstream suppliers in developing countries and end customers in developed countries, as
both demand signal and supply flows were severely disrupted. In comparison, Thailand is a
major supplier in the global supply chain, particularly in the auto and electronic sectors.
Therefore, downstream partners in the supply chain were adversely affected by the disaster
as they were unable to source parts and components from Thailand during the flood.
4.1 The Great East Japan earthquake
In March 2011, an earthquake struck Japan triggering a devastating tsunami,
which led to the meltdown of nuclear reactors in Fukushima. The disaster caused a
record 210 billion United States Dollars (USD) in economic damage, representing 3.8
per cent of Japans Gross Domestic Product (GDP).4 Production sites in affected coastal
areas experienced one and half times as much damage as inland areas (Okada, 2011).
The combination of the earthquake and tsunami damage and the meltdown of the
Fukushima nuclear reactors affected broad areas and caused severe damage in various
sectors, especially in the manufacturing and chemical industries. As a result of this
disaster, individual firms suffered huge direct losses, and the disaster could have a long-
term impact on the ability of firms to produce and deliver their products or services.
4 EM-DAT, the international disaster database, Available from http://www.emdat.be/ (Accessed 30 March
Box 1. Earthquake damage of Renesas Electronics Corporation
Renesas Electronics Corporation is a Japanese semiconductor manufacturer and the
worlds largest manufacturer of microcontrollers. The corporations Naka Factory and
other manufacturing facilities were severely damaged by the earthquake. In addition to
the cost for restoring damaged properties, Renesas had to dispose of damaged stock and
other fixed assets as well as compensate the loss of leasing contracts. Renesas also
needed to cover fixed expenses in spite of production stoppage. Although the company
carried insurance, it recovered less than one quarter of the total loss on the disaster as
the insurance only covered part of the disaster risks. Table 1 presents the corporate
loses to Renesas caused by the earthquake.
Table 1. Losses for earthquake damages in 2011, Renesas Electronic Corp
Repairs to property, plant and equipment
(expenses for restoring to the original condition)
Loss on disposal of stock 90.7
Loss on disposal of fixed assets 77.1
Fixed expenses during suspension of operations
(loss for inability to operate)
Loss on cancellation of lease contracts and others 37.3
Total loss on the disaster 814.2
Insurance payments received (198.9)
Net loss on the disaster 615.3
Note: Calculated based on 1USD = 80.5 Japanese Yen
Source: Renesas Annual Report 2011
Some firms, although they were not hit directly by the earthquake and tsunami,
experienced the disaster impact indirectly due to damaged infrastructure in the country. The
power supply in the northern part of Japan was severely disrupted due to the failure of the
Fukushima nuclear power plant. As a result, the production of many industrial plants
stagnated (Davis, 2011). Furthermore, many roads and railways were destroyed and almost
all major sea ports in the affected areas were closed (Wassener and Nicholson, 2011). This
rendered the mobility of final products, components and raw materials very difficult, thus
causing various supply chain disruptions.
The catastrophe also generated several impacts on human capital and the labour
market. In the directly-affected region, the number of applications for unemployment
insurance rose sharply in the first few months (Berkmen et al., 2011). The disaster also had
a nationwide impact on the labour market due to increased bankruptcies and loss of
employment. In addition, the disaster forced a reallocation of human capital to different
geographical locations and industrial sectors (Kirchberger, 2011). As a consequence, gaps
between labour demand and supply in terms of quantity and skills further raised
In response to the disaster, the Government of Japan implemented a number of
employment promoting programmes, such as Hello-works and the Japan as One work
project, to facilitate job creation and job matching (Rokumoto, 2012; Japan Ministry of
Heath, Labour and Welfare, 2012). Therefore, affected firms, especially those in the
manufacturing sector, rapidly regained their levels of employment, as they were working
to recover their production to the level prior to the earthquake and tsunami (Thompson,
2012). In March 2012, employment in the finance, insurance, real estate, mining,
construction and services sectors exceeded the level of March 2011 (Thompson, 2012).
As the economy of Japan is highly integrated into the world economy, the direct and
indirect supply disruptions caused by the disaster were experienced globally. Following the
Great East Japan earthquake, Japanese automobile production and electrical component
production declined by 47.7 per cent and 8.25 per cent, respectively.5 As Figure 3 illustrates,
the ill effects of the Japanese catastrophe spilled over to other countries in the region. This was
most clearly evident in the cases of Thailand (-19.7 per cent), the Philippines (-24 per cent),
Indonesia (-6.1 per cent) for automobile production, and the Philippines (-17.5 per cent) and
Malaysia (-8.4 per cent) for electrical component production. Disruptive impacts from the
Great East Japan earthquake had a longer impact on the automotive sector (about three months)
than on the electrical sector (about two months).
Figure 3. Disaster impact spill-over from the Great East Japan earthquake
Auto production after Japanese earthquake
JAPAN THAILAND PHILIPPINES INDONESIA
March-11 April to June-11
Electrical components after Japanese earthquake
JAPAN THAILAND PHILLIPPINES MALAYSIA
March-11 April to May 11
Source: CEIC Data Company Ltd (Accessed 30 March 2012)
The disruptions caused by the disaster in Japan strongly impacted some supply
chains, particularly those that rely on few sources or a single source for a certain inputs.
For example, Ethox Chemicals, an American chemical multinational, relies on a key
material supplied by only three companies in the world, one of which is located in Japan.
After the disaster in Japan, Ethox suffered supply shortages as the other two suppliers (in
Europe and Malaysia) were not able to make up for the supply stoppage in Japan.
Another example is in the automobile industry. With the damage to Renesas Electronic
Corp, the largest manufacturer of custom-made microchips in the world, the entire
automotive industry in Japan and the other parts of the world experienced severe
production suspension, because the user-specific chips were difficult to re-source and the
tight “just-in-time” management in the industry resulted in extremely low inventory,
usually for up to only six hours (Endo, 2011)
5 CEIC. Available from http://ceicdata.com/ (Accessed 30 March 2012)
Supply chain disruptions and corresponding production stagnation in several
industries, particularly export-oriented industries, highlighted the risks of losing global
market share. For example, in the steel industry, Posco, the worlds third-largest
steelmaker by output, based in the Republic of Korea, gained a share in the market for
materials for shipbuilders in the region, replacing Japanese steelmakers (Narayanan,
2011) The supply chain disruptions in the automobile industry in Japan caused by the
earthquake resulted in a severe shortage of small and mid-sized cars in the world market
as well as reduced automobile production in the United States of America and Europe,
which depend on Japanese suppliers of parts (Snyde