How 2011 Prepared Us for TodayProcurement
The Japanese Earthquake of 2011 and resulting tsunami are not exactly top of mind these days. But the connections between that event and the current Covid-19 crisis are more prominent than most realize.
On Friday March 11, 2011, at about 2:45PM local time, the most powerful earthquake ever recorded in Japan struck. The epicenter was more than 40 miles off the Japanese mainland. However, the ocean-based nature of the quake only intensified the destruction. In addition to the “traditional” damaging effects of an earthquake, this one also created tsunami waves over 100 feet high moving at hundreds of miles per hour. Over 15,000 people died as a result, most by drowning.
In addition, the quake caused thousands of injuries and billions of dollars in damage. Some of the most significant damage occurred at the Fukushima Nuclear Plant. Reactor meltdowns triggered by the quake resulted in widespread contamination and thousands of evacuations.
You may remember the death and destruction from 2011 and draw a connection to the toll of the current coronavirus pandemic. But few remember the stress the 2011 event placed on global supply chains.
At the time of the disaster, Japan was (and still is) the 3rd largest economy in the world. The country was well known for its production of automobiles and electronics. A substantial portion of silicon wafers, a key component in computer chips, was produced in the area directly affected by the quake. Agriculture, financial services, biotech/pharmaceuticals and telecommunications also accounted for a large portion of Japan’s GDP.
Large trading partners included China, the United States, Australia, and South Korea. The interdependence of the global supply chain guaranteed the effects would extend far beyond the Japanese economy.
Downstream customers, such as the big 3 automakers in the US, who relied on Japanese suppliers had to find alternate channels to meet their production requirements. And sellers in the Japanese market, such as Australian mining companies, had to find new customers to replace those Japanese manufacturers who were forced to halt production due to the quake.
Thankfully, by 2011 the global supply chain had an arsenal of weapons to help combat the economic aftershocks of the disaster. We had a good understanding of risk and how to mitigate it, whether it be political, financial, environmental, strategic, operational, etc. We had scientifically proven methods to prevent supply chain disruptions: safety stock, TQM, and optimization to name a few. We also had access to mature technologies to manage the risk and apply the scientific methods.
A Procurement Officer Survey conducted in 2012 by the IBM Institute for Business Value found that 53% of respondents believed their organization was “effective” or “very effective” at leveraging Supplier Relationship Management and Supplier Risk Management technologies. 89% of respondents judged to be “Innovative Performers” believed their organization was “effective” or “very effective” at leveraging these technologies.
The human toll of the Japan quake was truly tragic and rebuilding would take years (or decades in the case of the nuclear power plant). Although the supply chain was tested, it remained remarkably resilient. Downstream customers were able to fill orders by finding substitute suppliers throughout the global ecosystem. Sellers were able to find other markets for their goods and services. Technology facilitated all these activities. By Summer, many businesses in Northern Japan were able to resume production and by early 2012 the industrial output of the affected areas had reached pre-disaster levels.
Today we have shortages of sanitizer, critical medical supplies, toilet paper (?) and laptop computers. But aside from items used to battle the virus directly or commodities that support our new virtual lives, has anyone noticed how much is still available to us?
Despite severe disruptions, most goods are still flowing across the globe to satisfy consumption. It may now take longer for a truck loaded with agricultural goods to pass from Italy to Austria, but those goods are still arriving at their destinations. Automobile factories are curtailing production but the drop in consumer demand is influencing those actions as much as part shortages. These are trying times to be sure, but not necessarily because the supply chain is failing. In fact, it is holding up remarkably well given the global scale of this crisis.
Shortly before the Covid-19 crisis swept through Europe and North America, Forrester Consulting surveyed finance and procurement leaders at over 400 organizations to evaluate the need for effective procurement management. They found that 94% of “Advanced” procurement organizations proactively monitored risk and 91% of those organizations planned on increasing their incremental investment in technology.
Some of those professionals surveyed used the lessons learned from 2011 (and similar disruptions) to prepare for our current crisis. However, the same study found a large gap between advanced orgs and their less mature peers. 84% of “Beginner” procurement organizations did not proactively monitor for risk. 83% did not regularly assess supplier performance and act to improve deficiencies. 84% did not proactively monitor contracts for expiration and risk.
Understandably, Procurement leaders today are heads down and in many cases scrambling to work with what they have to help their organizations manage the crisis. But this crisis, like all others, will end. When it does, Procurement leaders must leverage the exposure they’ve gained in this crisis to push for needed changes, in people, processes and technology to ensure they are ready for the next crisis. Most Procurement organizations are not yet advanced. They need to catch up, quickly. Fortunately, they have great examples to emulate.