To make sure your business doesn’t get hit hard by fluctuating lead times, you need to understand how international natural disasters could affect you - and where they are
The earthquake and subsequent tsunami in Japan in March have the potential to affect construction industry lead times for many months to come. It’s been just over 100 days since the earthquake, and much has been reported about the effect of supply chain issues on the electronics and automotive industries but very little has been reported on the effect on construction. This article looks at the actual and potential impact of this and other global natural disasters on the construction industry and on lead times.
The cost of the disaster in Japan is estimated to be in excess of £186bn. Some 130,000 homes were damaged and more than 10,000 people died, which has pushed the country back into recession. The loss of the Fukushima nuclear power plant has created electricity supply problems across much of the country and the damage to roads and concerns about potential aftershocks is affecting logistics. All of these problems impact heavily on industrial infrastructure and the country’s ability to maintain its export capability.
Japan is a key supplier to many industries, from automotive to high-tech electronics. The country’s reliance on just-in-time delivery has resulted in many Japanese car manufacturers around the world closing for a short period soon after the disaster. Similarly, the manufacture of electronic components for mobile phones, computers and televisions was also significantly reduced. The fact that these Japanese industries are, in many cases, second or even third-tier suppliers means that they reach into and have a direct impact upon production in many other industries.
This can have a significant effect on industries supplying to construction that rely on Japanese components, such as engines, hydraulics, semiconductors and displays units. This problem is further exacerbated by the fact that construction is not a major client to these industries and therefore any capacity they have is likely to be focused on their key clients in the automotive and consumer electronics industries. The net effect is the potential for increased lead times in construction.
Already there have been reports from Japanese lift manufacturers of shortages of components creating extended lead times. Similar problems could be expected in other areas including building management systems, alarms, audiovisual equipment and the availability of plant and equipment including hoists, generators and hydraulic plant.
While many of the factories in Japan that were affected are now back up and running, damage to the infrastructure is still creating problems and returning stock to their previous levels is proving difficult.
Because the majority of the items supplied from Japan are components, it is often not immediately obvious whether a piece of equipment contains components from Japan that may be in short supply. It is therefore increasingly important to understand better how the components are sourced and if there is any risk relating to extended lead times.
The global recession has meant that demand for commodities from Japan has been low and in the UK the suppressed construction market means that impact on lead times has been contained. However, with increasingly optimistic reports about the economy, global demand for components from Japan may improve and there is a risk that the supply for construction could become more constrained. Should the UK construction economy improve, there will be the potential for extended lead times.
The Japan disaster demonstrates the impact the increasing global market is having on the construction industry and so the need for those advising clients on lead times to be more aware when sourcing commodities used in construction. While most people involved in planning and procurement capture intelligence about the first tier supply chain and in some cases down to the second tier, these developments demonstrate a need for improved supply chain management to capture information and understand the sourcing strategies of third, fourth and even deeper supply chain levels to mitigate risks in construction. The industry already does this with materials that can only be sourced internationally, such as stone, but it needs to be applied much wider.
In the past when supply was largely from within the UK, industries would evolve in regions, such as steel around Sheffield and cars in Oxford or Birmingham. With the advent of global markets, these now evolve around countries as has been seen with the electronics and automotive industries in Japan. It is therefore important to begin to understand the potential risk that natural disasters can have on manufacturing output. Recently we have seen an earthquake and tsunami in Japan, tsunamis in Thailand and volcanic eruptions in Iceland, Understanding where these risks are and linking them to their key manufacturing or commodity outputs will provide an insight into the risks associated with project lead times.
In conclusion, it is no longer sufficient in construction supply chain management, planning and procurement to ignore the impact that global sourcing is having on the availability of commodities for our industry.