Japan Shows Global Business Can Never Be Global Enough [Update]

Beyond the enormous pain and loss that the people of Japan are experiencing from the earthquake, tsunami, and aftermath, there has been a major impact on international business. Japanese carmakers have not only shut down domestic production, but also engines and parts needed in factories around the world. Shutdowns of Japanese electronics plants could push global prices of key components higher.

[Update: Apple (AAPL), General Motors (GM), and Boeing (BA) are three North American companies already feeling the supply chain impact.]

For Japan, it's calamity. For business in other parts of the world, it raises major questions about supply chains, the complex webs of suppliers, manufacturers, and distributors that represent how products reach customers. Some suggest that the Japan disaster shows an inherent problem in lean manufacturing (factories match production to customer demand and arrange for just-in-time delivery of materials and components) and modern cross-border supply chains. But if anything, the situation might suggest the opposite: that what we need is a greater, not lesser, global approach to manufacturing.

Railing against supply chains
Here's a sampling of how some opinion has begun to turn against international supply chains:

• My BNET colleague Matthew DeBord, wonders if the disaster shows a critical weakness of lean manufacturing practices. His answer? Diversified manufacturing plants.
• Gillian Tett at the Financial Times says that insurance group Zurich has tracked more than 1,000 examples of supply chain disruptions bringing manufacturing plants to a halt. And according to the World Economic Forum, many of the potential vulnerabilities aren't understood and certainly not addressed.
• Yves Smith at the blog Naked Capitalism, reacting to Tett's piece, says that business reengineering, including complex supply chain management, relies on bogus thinking similar to financial reengineering that brought us the Great Recession.

Now for the reality check: The products that companies make today create the underlying complexity. Whether a factory needs commodity chemicals, sheet metal screws, semiconductors, batteries, tires, or glue, no one business can do it all. The more parts necessary, the fewer the company is likely to be able to manufacture itself, and the more complex the supply chain gets.

An old story
This is true whether a company pushes the bleeding edge on some highfalutin super-integrated, complex cross-manufacturer supply chain initiative, or if management wants to do things the "safe" old-fashioned way by keeping higher inventory levels. You have to buy the stuff from someone.

And there are trade-offs, certainly. The leaner the operation, the more a single disruption can cause problems. But the naysayers miss a critical fact: older types of operations also face trade-offs, and problems can happen far more often. Here are just a few of the issues that can appear on a regular basis:

• Stocked parts become obsolete because consumer tastes suddenly change and a company must bring a new product to market.
• Sudden increases in demand wipe out inventory on-hand and the manufacturer can't easily bring in additional stock, so orders go unfilled.
• Overly large investment in inventory drains cash otherwise available for operating the business, which can create varying degrees of financial instability, depending on the business and industry.
• Inventory demands facilities to handle it, further extending the cost.

More globalization is needed... but impossible
If anything, there is an argument that globalization simply isn't broad enough. There is too much regionalism in some types of manufacturing. For example, according to an email alert from semiconductor market research firm Objective Analysis, 40 percent of the world's flash NAND production and 15 percent of DRAM is manufactured in Japan. Objective expects "phenomenal price swings and large near-term shortages as a result of this earthquake."

The problem is not that supply chains are complex -- they will always be complex -- but because globalization of manufacturing has created regionalism. Want DRAM? Much of the supply is in Japan and South Korea. PC motherboards? Try Taiwan. Need cotton? China, India, and the U.S. represented more than 64 percent of world production last year. Want rare earths for electronics manufacturing? China is virtually your single choice today.

What would make sense is greater globalization on an industry, not an individual corporate, level. That could produce the diversity necessary to help overcome such a geographic cataclysm. But it's not easy -- and may even be impossible.

The more complex the science and engineering, the more people in the industry tend to cluster, concentrating expertise. In addition, the more complex and technically dependent the type of manufacturing, the more expensive the plants tend to become, and the greater need to drive increased volume to make capital investment economically sound.

In other words, it's not enough for an auto manufacturer to build plants around the world. So do all of its suppliers and their suppliers. And some of them won't be able to afford multiple plants to make the same number of products as today. The diversification that is really needed is likely impossible. Maybe it's time to remember Shelley's poem Ozymandias and admit that there will be disasters that no one can avoid, not matter how good their planning and intentions.

Related:

• Lean Production: Another Casualty of the Japanese Quake?
• Japan Earthquake: The Energy Players Who Stand to Benefit
• Japan Earthquake and Tsunami: Possible High Tech Impacts
• Power Plant Damage May Slow Earthquake Recovery for Japan's Automakers
• Don't Panic About "Japan Syndrome" Just Yet
• Japan Earthquake: Lessons From Kobe Offer Hope for Swift Recovery in Sendai