![]() We decided to address this gap of knowledge, considering that understanding inventory and flexibility patterns will allow us to explore their economic sustainability, drivers, and downsides and simply provide better guidance to industries. Firm responses to the 2011 Japan earthquake The risk is that inefficient inventory and flexibility investments may consume more resources than they can protect for firms and the economy.īut little is known about how most firms actually react to LPHC events beyond a few anecdotal examples observed in the immediate aftermath of the 2011 Japanese earthquake: Merck and ZF-TRW, an automotive supplier, responded by building up inventories, while Toyota stated that it did not intend to abandon its low inventory strategy in the face of disruptive events. ![]() While strategies for increasing flexibility (use of overtime, outsourcing, etc.) are considered more cost-effective than simply increasing inventories, they still require the firm to compromise between investing in resilience factors versus capital improvements and innovation. Two main approaches to improve corporate resilienceīut should firms even bother making provisions for future shocks, if they are both improbable and unpredictable? Some fellow scholars have suggested that companies could simply not prepare at all, or purchase insurance.Īfter all, two of the most discussed theoretical approaches to improving operational resilience, that is, holding (excess) inventories and/or volume flexibility, come at a cost. In fact, such events have always been threats to firms, yet surprisingly little is known about how firms adapt, in terms of longer-term preparation for future LPHC events. While the tsunami and earthquake in Japan have produced soul-searching about how the industry should react, we can only observe that empirical research has offered little guidance so far. In our recent research article, we noted that the cumulative effects of the March 2011 Great East Japan Earthquake such as power outages, fuel shortages, and breakdowns in supply and delivery lines, affected the entire country and significantly impacted Japanese industry, with an 80 per cent drop in vehicle production in April 2011 compared with January-February for example. Especially as supply chains are increasingly designed for efficiency with low inventory levels, which makes them more vulnerable to disruptions. They severely impact global supply lines, with dire economic consequences. These events can be extremely disruptive, like the 2010 eruption of the Eyjafjallajökull volcano in Iceland that caused a virtual lockdown of European airspace. LPHC events include what insurers archaically refer to as “Acts of God” (volcanic eruptions, hurricanes, floods), man-made industrial accidents (like the Rana Plaza collapse) and terrifying pandemics (like COVID-19). Even more so for black swan-type, low-probability high-consequence (LPHC) events, due to their unpredictable timing and unknown impact. ![]() ![]() It is very easy to pepper inspirational speeches with glib phrases like “expect the unexpected,” but when it comes to detailed strategic planning, it is very difficult for firms to prepare for the truly unforeseeable. After the event, managerial decisions appear to be influenced, at least partially, by instinctual reactions and incomplete data. When a major, unforeseeable event like the 2011 Japan earthquake sends shockwaves through supply chains, how do companies adjust operations? Christian Durach, Tomas Repasky and Frank Wiengarten write that exposure to disruptive events increases the perceived probability of a recurrence, no matter how unlikely it may be.
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