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PuRCHAsing And suPPly CHAin RisK 191
offer the buyer significant benefits – extra leverage in terms of volume discounts, easy
sharing of market and operational data, and so on – but for all the additional capability
that such an arrangement provides it also, as per our previous discussion of transaction
cost economics, creates extra rigidity and risk. More obviously, since the publication
of the first edition of this book, numerous events have had a major impact on global
supply networks. But regardless of whether we are discussing the September 11 terrorist
attacks, the Severe Acute Respiratory Syndrome (SARS) pandemic in 2002–2003, the
Banking Crisis and subsequent economic recession, or the Icelandic Eyjafjallajokull
volcano that grounded flights across Europe for a week in 2010 – all of these events
produced significant disruptions for supply chains and produced major losses for many
companies involved. Even less severe events can trigger significant supply chain prob-
lems and have a corresponding impact on financial performance: stock market reac-
tions to announcements of supply disruptions have resulted in market capitalisation
declines of as much as 10 per cent. 15

Example Tsunami disrupts Japan’s global supply chains 16

The volcanic ash from Iceland that disrupted air transport across Europe provided a preview of
how natural disasters could throw global supply chains into disarray – especially those that had
adopted the lean, low-inventory, just-in-time philosophy. That was in 2010. Yet the following
year an even more severe disaster caused chaos in all supply chains with a Japanese connec-
tion, and that is a lot of supply chains. It was a quadruple disaster: an earthquake off Japan’s
eastern coast, one of the largest ever recorded, caused a tsunami that killed thousands of people
and caused a meltdown at a nearby nuclear power plant, which necessitated huge evacuations
and nationwide power shortages. The effect on global supply networks was immediate and
drastic. Sony Corporation shut down some of its operations in Japan because of the ongoing
power shortages and announced that it was giving its staff time off during the summer (when
air conditioning needs are high) to save energy. Japanese automobile companies’ production
was among the worst affected. Toyota suspended production at most of its Japanese plants and
reduced and then suspended output from its North American and European operations. Nissan
said it would be suspending its UK production for three days at the end of the month due to a
shortfall of parts from Japan. Honda announced that it was halving production at its factory
in Swindon in the south of England. However, the disruption was not as severe as it might have
been. Honda said that the vast majority of the parts used in Swindon are made in Europe, and
added that its flexible working policy would allow it to make up for the lost production later
in the year. ‘Thanks to a working-time agreement, there will be no loss of earnings for the workforce
while the company cuts production’, said Jim D’Avila, regional officer for the Unite union.
In the longer term, the disruption caused a debate amongst practitioners about how supply
chains could be made more robust. Hans-Paul Bürkner, chief of the Boston Consulting Group,
said, ‘It is very important now to think the extreme. You have to have some buffers.’ Some commenta-
tors even drew parallels with financial meltdowns, claiming that just as some financial insti-
tutions proved ‘too big to fail’, some Japanese suppliers may be too crucial to do without. For
example, at the time of the disruption, two companies, Mitsubishi Gas Chemical and Hitachi
Chemical, controlled about 90 per cent of the market for a specialty resin used to make the
microchips that go into smartphones and other devices. Both firms’ plants were damaged and
the effect was felt around the world. So maybe suppliers who have near-monopolies on vital
components should spread their production facilities geographically. Similarly, businesses that
rely on single suppliers may be more willing to split their orders between two or more suppliers.

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