Executive Briefings

The Lesson from Japan: Supply Chain Forecasting, Especially of Risk, Is Flawed

Perhaps one of the most far-reaching lessons of the Japanese earthquake-tsunami disaster pertains to how we plan for extreme events. An investigation by the Associated Press says engineers from the company that owns the Fukushima Dai-ichi nuclear reactor complex that was damaged by the tsunami disregarded evidence of earthquakes before 1896 when postulating the maximum-size quake and tsunami that the complex might face. Yet there is ample geological evidence that major quakes have hit the region prior to that year, the AP says.

The overly optimistic projections are tied to the way the Japanese calculate risk, AP concludes. "Because of the island nation's long history of killer waves, Japanese experts often will look at what has happened - then project forward what is likely to happen again," says the AP.

Many supply chain managers use a similar approach to forecasting. Whether we are forecasting product demand or trying to anticipate movements in fuel prices or freight rates, there is a tendency to use past experience as a guide to future behavior. We have seen time and again that this approach is flawed, particularly as supply chains and the businesses they support have become much more complex.

Read Full Article

Perhaps one of the most far-reaching lessons of the Japanese earthquake-tsunami disaster pertains to how we plan for extreme events. An investigation by the Associated Press says engineers from the company that owns the Fukushima Dai-ichi nuclear reactor complex that was damaged by the tsunami disregarded evidence of earthquakes before 1896 when postulating the maximum-size quake and tsunami that the complex might face. Yet there is ample geological evidence that major quakes have hit the region prior to that year, the AP says.

The overly optimistic projections are tied to the way the Japanese calculate risk, AP concludes. "Because of the island nation's long history of killer waves, Japanese experts often will look at what has happened - then project forward what is likely to happen again," says the AP.

Many supply chain managers use a similar approach to forecasting. Whether we are forecasting product demand or trying to anticipate movements in fuel prices or freight rates, there is a tendency to use past experience as a guide to future behavior. We have seen time and again that this approach is flawed, particularly as supply chains and the businesses they support have become much more complex.

Read Full Article