Japan: BCP Meets OMG!
On March 11, 2011, a massive 9.0-magnitude earthquake rocked the northeastern coast of Japan; resulting tsunami waves hit the coast just minutes later. The tag-team tragedy has left much of Northeastern Japan extensively damaged, thousands of people dead, injured or missing, and millions lacking electricity, water, transportation, and food. At press time, damage to a nuclear power facility was still unrepaired and the prognosis uncertain.
According to the United Nations, some 29,000 are dead or missing with approximately 11,000 confirmed deaths and nearly 18,000 people still reportedly missing.
“In Miyagi alone, the debris amounts to roughly 15 to 18 million tons, which is equivalent to 23 years worth of waste for the prefecture. It only has the capacity to dispose of 0.8 million tons per year. Authorities say it will take three years to remove all the debris and this does not include cars and boats,” a UN report says. “According to the Ministry of Land, Infrastructure, Transport and Tourism 15 sewage systems are not functioning or damaged in Iwate, 59 in Miyagi, and 14 in Fukushima.”
“Meltdown of nuclear power plants, while there is the possibility of very serious health effects, is primarily a problem because shutdown of nuclear power generation means years of misery ahead for residents of Japan due to the rolling blackouts and brownouts that will be necessary and power demands continue to outpace supply,” says Scot Phelps of the Emergency Management Academy.
“The real problem faced by Japan right now is the lack of fuel and the lack of a consistent power supply,” Phelps says. “Lack of fuel is caused by both structural damage and bureaucratic rules. Consistent power supply is a critical problem for manufacturing, which requires power for production of a variety of goods, including iPads.”
Supply chain is, and will continue to be, a serious problem says Al Berman of DRI International.
“The thing that we’re going to see, and we’re starting to see it right now, is a replay of history – a shortage of chips,” Berman says. “That’s a replay of what happened 10 years ago or so to Apple after they released the iBook. Essentially what happened to them is that there was earthquake in Taiwan and Apple not only had to postpone the iBook, but it had to put in a chip that was not as powerful. For the iPad, it’s probably going to be a big bottom line issue because the chips aren’t coming out of Japan and the price of chips will probably go up 40 percent.”
“The other piece you saw is GM having to shut down their line for a couple of days because they weren’t getting parts out of Japan,” Berman continues. “And Ford just announced that they’re not building black or red trucks because they can’t get those pigments out of the supply chain.”
Berman says he views major disasters from a “historical” perspective. “When we’ve had these types of huge interruptions it impacts the flow of business for a long time. If we go back to Kobe, we saw interruptions in the supply chain that lasted that lasted three to six months when people couldn’t get supplies.”
“So, this is going to be a big, big supply chain problem. And it’s going to be even more of an impact, especially now as we’ve started to go through an economic recovery. One of the things we saw even in the recovery before Japan was limited credit, and lots of people not keeping inventories. So we were already seeing the inability for companies to meet demand. The automotive industry had big problems doing that, and so we’re going to continue to see those problems, I think, for a long time.”
But it’s not only the auto industry that will be hit. All manufacturing involving electronics is potentially at risk. Berman says the iPad is a great example. “Because of the way Apple works–a huge portion of what they’re going to deliver is a pre-order–there are a lot of people who ordered who are going to have to wait. And it certainly chills Apple’s cash flow situation. We already saw Apple’s stock start to fall because of failure to deliver, and I think we’ll see a lot more of that kind of thing. This is going to have an impact on our ability to grow the economy, especially in electronics and automotive.”
For Berman, the real lesson out of this crisis is the importance of planning for supply chain disruption. “Look, you can’t plan for this,” he says. “But what we can do is absolutely take a better look at our supply chain.”
God Only Knows
When John Jackson of Fusion Risk Management thinks of large-scale disasters, “one issue I always think back to is the Mira building bombing. American Fidelity had to evacuate their building even though their data center was fine. They had to evacuate because it was within the FBI crime scene zone.”
“Listening to news reports about Japan, I’m hearing about companies experiencing issues because of the power situation. It all comes down to that question of is it under your control or not and whether or not your plans consider things that are outside your sphere of influence,” Jackson says. “Everybody focuses on what happens if your data center goes down, but your business in not an island.”
Even after 30 years in the business of business continuity, Jackson thinks that “this is an interesting one. The multiple disaster scenario–earthquake, tsunami, nuclear power sources, and then the aftershocks that are continuing – which disaster do you plan for? I don’t know that anybody can say. When people reflect back on this, they’re going to see that it was an event beyond all expectation, that it’s not necessarily one you can plan for or against. In this situation of a series of catastrophic issues, there is no way to guard against them or plan around them. It’s the act of God scenario.”
Jackson says he foresees legal and contractual issues around force majeure clauses.
“Force majeure is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, crime, or an event described by the legal term ‘act of God’ (such as flooding, earthquake, or volcanic eruption), prevents one or both parties from fulfilling their obligations under the contract. However, force majeure is not intended to excuse negligence or other malfeasance of a party, as where non-performance is caused by the usual and natural consequences of external forces (for example, predicted rain stops an outdoor event), or where the intervening circumstances are specifically contemplated,” according to Wikipedia.
“It’s likely that force majeure will be called into play here, and that will see the involvement of the legal community,” Jackson says.
Says Phelps, “The real question for Japan is will they rebuild for yesterday’s economy or tomorrow’s economy? After a catastrophe, there is tremendous pressure to rebuild right now just the way things were, but crisis can be an opportunity to both ‘get it right this time’ and to build infrastructure for the next 30 years without the burden of the last 30 years getting in the way. Rebuilding for tomorrow is critical for Japan.”