MMRCDISCUSSION PAPER SERIES
No. 433

Supply Chain Disruption Risk and Recovery:
Temporary Diversification and Its Limits
Daniel E. Whitney
Massachusetts Institute of Technology
Jianxi Luo
Singapore University of Technology and Design
Daniel A. Heller
Yokohama National University
March 2013

東京大学ものづくり経営研究センター
Manufacturing Management Research Center (MMRC)
Discussion papers are in draft form distributed for purposes of comment and discussion. Contact the author for
permission when reproducing or citing any part of this paper. Copyright is held by the author.
http://merc.e.u-tokyo.ac.jp/mmrc/dp/index.html

Supply Chain Disruption Risk and Recovery:
Temporary Diversification and Its Limits
Daniel E. Whitney
Massachusetts Institute of Technology
dwhitney@mit.edu

Jianxi Luo
Singapore University of Technology and Design
luo@sutd.edu.sg

Daniel A. Heller
Yokohama National University
daheller@ynu.ac.jp

March 2013
Abstract
Diversification is the preferred hedge to supply chain risks, but many companies use sole sources anyway forlong-term strategic benefits. The enormous damage caused by the March 2011 magnitude 9.0 earthquake inJapan to industrial supply chains warns again that sole sourcing is risky, as many companies or industries
around the world were halted due to the loss of their sole suppliers in Eastern Japan. In the literature on
contingency actions, temporary diversification has been seen as a feasible response, especially for rare-but-long
disruptions. However, little is known about the limits of this approach and the situations where it is applicable.
This paper describes and compares two disaster recoveries: the well-known Aisin Seiki fire and the less wellknown Riken earthquake, first systematically documented in this paper. Numerous suppliers and competitors
volunteered to make parts for Aisin Seiki whereas no such response occurred in the Riken case, despite
important similarities in day-to-day operations strategy: sole or nearly sole sourcing, deep supplier relations, lowinventory, and severe disruption. Our comparative analysis suggests that characteristics of the affected productand/or its production methods (i.e. generic or asset-specific) limit the recovery alternatives. Temporary
diversification was and remains impossible at Riken due to the high degree of specificity required in the design
and production methods of the disrupted item. Unawareness of such limits to temporary diversification may
result in over-optimism regarding its availability and insufficient disaster preparedness. We also briefly describe
two other European cases.

11. Introduction
Supply chain disruption can result from natural and other disasters, such as earthquakes andfires (Kleindorfer and Van Wassenhove, 2004). Most recently and severely in March 2011,
the 9.0 magnitude quake and subsequent tsunami in Eastern Japan damaged or destroyed
many factories and disrupted the world’s electronics and automotive supply chains for a few
months. A single firm, Renesas Electronics lost $156 million as a result of damage to its
Naka facility, which was designed to withstand an 8.0-magnitude earthquake, and it took
three months to put the Naka facility back in operation (Courtland, 2011). Currently (2012)
the hard disk drive industry is dealing with hundred-year floods in Thailand. Such disasterinduced risk is often more severe than the operational risks of supplier unreliability affecting
quality and delivery.

In spite of the increasing disruption risks due to rare but devastating disasters and adiversification strategy being typically advisable to mitigate the risk (Wang, 2006; Wang andTomlin, 2010), many companies still insist on concentrated supply of certain components andparts, or as we call it below, fortification--i.e. the use of few suppliers and reliance on
vigorous recovery actions. They do so for the value of long-term learning abetted by repeated
and deepened relationships, and a deliberate tradeoff of these long-term benefits against someobvious short-term risks (Sheffi, 2005; Nakamoto, 2007). Companies that resolve the tension
between diversification and fortification by favoring the latter receive considerable criticism
from the lay press when a disaster strikes (Allbusiness, 2007; Reitman, 1997a; Chozik,
2007a).

When a crisis occurs, the loss can be limited through effective recovery actions (Sheffi, 2005;
Tomlin, 2006; Tomlin and Wang, 2010). Some of these recoveries using temporary
diversification (i.e. temporarily using alternate suppliers) become famous, as in the case of
the fire in 1997 at Toyota’s brake valve supplier Aisin Seiki (Treece, 1997; Reitman, 1997b;
Nishiguchi and Beaudet, 1998), where Aisin Seiki temporarily procured brake valve
machining from a variety of volunteer suppliers before it fully recovered its machining
capacity. This case has gained somewhat mythic status in supply chain risk management
literature. It makes one believe that the availability of temporary diversification makes JustIn-Time (low inventories, rapid response at low cost, etc.) and sole source supply chains
resilient in an event of disruption, so as to limit losses. Yet, many recoveries from severe

2disasters do not involve numerous suppliers rising up to produce the item lost in the disaster,and temporary diversification may not be a viable option in some situations. Our
understanding of the enablers and constraints of temporary diversification in response tosupply chain disruption is still limited.

This research aims to contribute to the supply chain risk management literature by providing
multiple cases that allow comparison of different disaster response scenarios and elaboratingon the economic-technical factors, notably asset specificity, that enable or constrain them.
We primarily compare the Aisin Seiki fire case to another less well-known recovery caseafter an earthquake that disrupted production of piston rings at Riken Corporation in Niigata
Japan in 2007. The comparison is based on data collected from the authors’ fieldwork at both
Aisin Seiki and Riken, augmented with public data. The two cases share many crisis
antecedents but have very different responses. Both similarly involve fortification in day-today operations: sole or nearly sole-source arrangements, low inventories, deep supplier
relations, and severe disruption. However, after the disruption at Riken due to the earthquake,no upwelling of alternate supplier support to make piston rings emerged. Our field
investigation found that temporary diversification was and remains impossible at Riken
because of the degree to which piston rings are specifically designed and made for theirrespective engines, an instance of asset specificity (Williamson, 1981). The authors hold thata Riken-like response is more likely than the Aisin Seiki response because so many parts incomplex products require specific assets, while recognizing further research on this point isneeded.

The rest of this paper is organized as follows. We first review the relevant literature in
Section 2. Section 3 covers the well-known Aisin Seiki fire case, including new information
obtained from our own interviews conducted in 2010 and 2011. Section 4 details the newcase on the Riken disruption, primarily based on the authors’ fieldwork and interviews at
Riken in 2010. Section 5 briefly describes two European recovery cases that follow the Aisin
Seiki pattern because the assets needed were not very specific. In Section 6, we trace thesimilarities and differences of these two responses to fundamental economic andtechnological factors. Section 7 concludes with summarizing our main findings, contributions
and direction for future research.

32. Literature Review
2.1 Supply Chain Disruption Risk Management
Supply chain risks fall into two broad categories: (1) operational risk from supplier
unreliability and its accompanying need for burdensome coordination to overcome supplydemand mismatches (i.e. due to quality and delivery issues), and (2) risk from disruption of
normal activities due to strikes, terrorist attacks, fires, natural and other disasters (Kleindorferand Saad, 2005; Van Wassenhove, 2006). This paper is mainly concerned with disruption
risk.

Disruption risk management is often divided into risk mitigation, i.e. preparedness before thedisruption, and responsiveness, i.e. contingency actions once the disruption has occurred(Tomlin, 2006; Van Wassenhove, 2006). A few operational strategies that managers can use
to manage supply chain disruption risks have been studied. In the literature, typical risk
mitigation strategies include carrying buffer inventories (Song and Zipkin, 1996; Tomlin,
2006), diversifying suppliers (Tomlin and Wang, 2005; Dada et al, 2007; Tomlin, 2009) andstrengthening customer-supplier relations (Krause, 1997; Handfield et al. 2000; Liker andChoi, 2004; Krause et al, 2007). Typical response strategies include using alternate or
standby suppliers (Tomlin, 2006; Chopra et al., 2007; Tomlin, 2009) and demand shift or
demand management (Tomlin, 2009).

Each of these risk management strategies has strengths and limitations, for which Tomlin andWang (2010) provide a comprehensive review. In some circumstances, combining several of
the above strategies can provide significant value. For example, Wang et al. (2010) suggests a
combined strategy of strengthening the relationship with suppliers while pursuing dual
sourcing, while Tomlin (2006) suggests the mix of carrying inventory and using backup
suppliers, under certain conditions. In addition, a complete supply chain risk management
program should also include risk monitoring, identification and assessment (Kleindorfer and
Saad, 2005). We must note that all these involve costs (Van Wassenhove, 2006), whether forfinding out how much the risk is, mitigating it, or setting up responses.

In fact, we cannot separate risk mitigation and response as they are intertwined. For instance,
better preparation before the disruption leads to a better response once the disruption occurs
4

(Van Wassenhove, 2006). Furthermore, the risk mitigators (e.g. inventory, sourcing
diversification, close manufacturer-supplier relationship) are also the keys of the day-to-day
supply chain operations, which affect overall benefits such as efficiency and learning.
However, the typical literature on supply chain risk management has paid little attention to
long-term benefits, which motivate firms’ overall operations strategy. In the following, we
review the benefits and risks (and the associated costs) of supply chain strategies, which
determine the context of our two primary cases that follow in Sections 3 and 4.

2.2 Supply Chain Strategy Considering Risk Management
First, maintaining a high inventory in anticipation of a disruption may reduce blackout
periods (Tomlin and Wang, 2010). However, during regular days, the high inventory may
reduce working capital and obscure operational problems. It is especially unfavorable if
disruptions are infrequent (Tomlin, 2006). Second, the risk mitigation literature often prefers
diversification (don’t put all your eggs in one basket) over concentration or fortification (putall your eggs in one basket and watch it carefully). Diversification reduces the risk of losing
all resources in a disaster, and limits the loss from not having the resources for the blackout
time (Tomlin and Wang, 2010). Diversification also offers opportunities to learn fromalternate sources, plus enhancement of competition due to greater ease of switching. However,
diversification incurs costs from added operational and organizational complexity, limits thedepth of mutual trust and relationship with individual suppliers, and loses some value
available from concentration, such as scale economies (Sheffi, 2005).

The decision to fortify rather than diversify induces higher risk of losing the whole resource
if a disaster strikes. Additional risks include dependence for knowledge and technology (Fineand Whitney, 1999) and holdup (Williamson, 1981). The potential benefits of fortification
include making it more possible to pursue the alignment of product design choices with
manufacturing methods and operational strategy, plus opportunities for mutual learning about
these alignments (Whitney, 1993) and conventional advantages such as scale economies.

Fortification becomes particularly crucial when the procured part is highly interdependent
with other parts of the final product, because that demands coordination in design andmanufacturing across assembler and supplier, and requires both parties to invest in skills,
assets and resources that are valuable only in the context of their specific relationship5

(Asanuma, 1998; Sako, 1992; Fujimoto, 2007; Luo et al., 2011), in order to deliver acompetitive level of quality, price and service (MacDuffie, 2008; Handfield et al. 2000;
Wang, Gilland and Tomlin, 2010). In contrast, diversification is relatively easier to apply toparts that are modular (Baldwin and Clark, 2000) and that can be made using generalcapabilities readily available from alternate sources.

Therefore, from a mitigation perspective, “lean” or JIT supply chains bear a high risk of
disruption in the event of disaster due to the deliberate choices of low inventory andfortification made for long-term operational benefits. The lean production principles(Womack et al, 1990) emphasize cost minimization (keeping inventory low), problem solving,long-term relationships, and collaborative learning and capability building, all of which
fortification fosters. In the Japanese automotive industry (the context of our two main cases),
Toyota and other manufacturers generally hold the belief that the benefits of minimal
inventory and fortification (sole supplier for specialized automotive components/parts) far
outweigh the risks of supply chain disruptions and associated losses (Sheffi, 2005; Nakamoto,2007). For additional reading on these points, see MacDuffie (1995), Hopp and Spearman(2004), and Fujimoto (2001; 2007). Thus, despite repeated criticism from the lay press every
time a disaster strikes and disrupts the lean supply chain, these companies consistently stickto such strategies (Reitman, 1997a; Chozik, 2007a,b; Allbusiness, 2007; Nakamoto, 2007).

Actually, fortification and low inventory are not necessarily wholly negative for risk
management as they can offer benefits for response effectiveness. Fortification, throughworking closely with sole partner for a long time, can provide opportunities to explore
synergies and strengthen relationships, which are beneficial for effective cooperation,
coordination and collaboration across the customer and supplier firms in recovery efforts(Kleindorfer and Saad, 2005). In addition, tight inventories quickly reveal problems in the
supply chain after they occur, allowing them to be addressed promptly (Nakamoto, 2007).

2.3 Temporary Diversification and Limits
Blackout time and economic loss due to disruption can be trimmed if responses are effective.
The literature on contingency actions has paid increasing attention to temporary
diversification, i.e. temporarily using alternate suppliers (Sheffi, 2005; Tomlin and Wang,2010). Tomlin (2006) implies “contingent rerouting” (which we call temporary

6

diversification) is increasingly favored over mitigation strategies as disruptions become lessfrequent but longer. In Tomlin and Wang (2010), the same strategy is called backup supply.
Nonetheless, these studies only considered one single alternative source that temporarily
steps in during the disruption and assumes that this alternate was identified, contracted inadvance of any specific disruption, and has the necessary capacity on standby reserve.
Studies on the recovery of Aisin Seiki show that the sourcing of P-valves was temporarily
diversified to a huge number of impromptu suppliers before Aisin Seiki fully recovered(Reitman, 1997b; Nishiguchi and Beaudet, 1998; Sheffi, 2005, pp. 211-215).

Scholars have considered various enablers of such a wide range of temporary diversification,
including self-organization and social networking (Watts, 2003, pp. 254-260), knowledge
emergence (Kakihara and Sørensen, 2002), collaborative spirit, trust and capability sharing(Nishiguchi and Beaudet, 1998; Sheffi, 2005) etc. Nishiguchi and Beaudet (1998) further
argue that the Japanese “institutionalized mechanisms,” such as supplier associations andKeiretsu, foster trust building and capability sharing among firms, which make possible sucha broad range of suppliers for temporary diversification.

However, our analysis below of a more recent disruption recovery (at Riken Corporation) in
the same culture context (Japan), industry context (automotive parts), and operational context(JIT, low inventory and sole sourcing), show that Riken and Toyota’s contingency actions did
not involve alternate suppliers. Clearly temporary diversification is not the only response
pattern, and knowledge-sharing and trust might not be the only influences to disaster
responsive capabilities. Tomlin and Wang (2010) implies that contingent rerouting is only
available when there is an additional provider capable of performing the disrupted activity,and it must also have additional capacity, i.e. volume flexibility (Tomlin, 2005) when called
upon.

There might be additional factors that constrain the range of temporary diversification, forexample, product design and production process. It seems reasonable to suggest that the more
specialized the item or the more specialized the activity, the fewer capable temporary
providers there are likely to be. The design and nature of products for which the supply chain
is created, such as product complexity, uniqueness (Lamming, 2000) and customization
versus standardization (Asanum, 1988), are believed to have an impact on the production
processes used and riskiness of the supply (Kleindorfer and Saad, 2005; Tomlin and Wang,
7

2010). But the technical attributes of product and production process have not been explicitly
studied in supply chain risk literature. In our comparison of two main empirical cases, wewill consider them as possible factors that may have determined the differences in the rangeof responses in the two cases.

In the following, we first describe our two main cases in Japan respectively in detail, then two
additional cases in Europe briefly, and then conduct a theoretical and comparative analysis totrace their differences to fundamental enablers and/or constraints to disruption responses.

3. Aisin Seiki
The Aisin Seiki fire and how the supply chain of P-valves (proportioning valves forautomotive brakes) recovered from the disaster was first well documented and analyzed by
Nishiguchi and Beaudet (1998; 2000), and re-examined from various perspectives by otherresearchers (Kakihara and Sørensen, 2002; Watts, 2003; Sheffi, 2005). The authors
conducted their own interviews with Aisin Seiki in 2010 and 2011.

Aisin Seiki Co. Ltd presently one of the dominant auto suppliers in the world, is a leading
supplier of brake systems. A P-valve is a machined casting into which are inserted a numberof valves, springs, and seals, as shown in Figure 1. It is about the size of a pack of cigarettes
and, while not that complicated a part, it is critical to safety and must be custom designed foreach vehicle type in which it is installed--even four-door and five-door variants of the same
car model will likely need different P-valves. The machining process, disrupted by the fire,consists of drilling holes of different sizes and at different angles in different but similar
castings, all in one plane, varying with the requirements of each car model.

Figure 1. A Typical P-Valve. Left: Size comparison to a pen. Right: Cutaway view.

8(Source: Philipp Mayrl, photographed during the authors’ visit to Aisin Seiki in 2010). Note the styledifferences between these two examples (and the one partially visible in the right photo) in terms ofnumber and orientation of pipe connections.

Over many years, Aisin Seiki developed strong operational capabilities required to provide
Toyota with the required number and type of P-valve from among a growing variety on a JIT
basis. As Aisin Seiki developed this capability, Toyota increased the number of different
varieties. Soon, Aisin Seiki was so good at accommodating Toyota’s variety demands, lowinventories, and rapid response at low cost that it had won nearly all of Toyota’s requirements
for this part. To meet these needs, Aisin Seiki developed specialized equipment that could
machine the castings in many varieties with almost transparent and fast changeover capability
to match Toyota’s mix of required types, low inventory, and short delivery cycles. It was thisequipment that was destroyed in the fire on Feb 1, 1997. Unaffected were the supply of
castings themselves, production of components assembled into the machined castings, andthe assembly area itself.

As shown in Table 1, in 1996, about 89.8% of Toyota’s P-valve purchases in Japan camefrom Aisin Seiki. To pursue efficiency and scale economy, Aisin Seiki located all its P-valve
manufacturing lines in Japan in a single building on a seven-building complex in Kariya,
Japan, with a daily volume of 32,500 P-valves when the fire broke out in 1997. Table 1
summarizes the shipments between the major suppliers and customers in the automotive Pvalve market in Japan in 1996.
At 4 AM on Saturday, February 1, 1997, a fire broke out that ignited several wooden
platforms in building No.1 at the Kariya complex. It has been impossible to pinpoint theexact cause of the fire, but the current plant management holds that the most likely cause wasan overheated generator that had been located on the shop floor. The building essentiallyburned down. The special-purpose equipment for machining P-valve castings was destroyed.
By 9 AM that day, Aisin’s production capacity for P-valves had vanished almost entirely.
Toyota and Aisin Seiki only held two or three days of stocks because of their dedication to
JIT production principles. On Tuesday, February 4, Toyota had to shut down 20 of its 30
Japanese vehicle assembly lines because it had no more P-valves, and production ceased at
all of its lines on Wednesday February 5. Consequently, several hundred suppliers to Toyota
also had to stop production.

9

Table 1. Monthly Supplies and Purchases of Proportioning Valves (P-valves) in Japan, in 1996
Total Production(1,000 units / Month)MarketShare

Aisin Seiki

365.7

41.9%

Nissin Kogyo

162.8

18.7%

Nabco

126.4

14.5%

Tokico

88.65

10.2%

Shinei Kogyo

47

5.4%

Bosch Japan

42.99

4.9%

Sumitomo
Electric

33.15

3.8%

Akebono Brake

5.3

0.6%

P-value Supplier

Manufacturer

Purchases(1,000 units / Month)

Percentage

Toyota Motor
Mitsubishi Motor
Isuzu Motor
Suzuki Motor
Daihatsu Motor
Nissan Motor
Honda Motor
Toyota Motor
Daihatsu Motor
Suzuki Motor
Nissan Motor
Fujitsu Heavy Industry
Suzuki Motor
Nissan Motor
Mazda Motor
Mazda Motor
Nissan Motor
Suzuki Motor
Mitsubishi Motor
Suzuki Motor
Nissan Motor
Honda Motor
Nissan Diesel
Isuzu Motor
Daihatsu Motor
Mazda Motor
Isuzu Motor
Mitsubishi Motor

237
76
22.5
21
9.2
0.01
104.9
27
25.9
5
55
39.9
31.5
62.45
26.2
39
6
2
19.6
15.5
6.54
0.6
0.5
0.25
25.9
3.8
2.25
1.2

64.8%
20.8%
6.2%
5.7%
2.5%
0.0%
64.4%
16.6%
15.9%
3.1%
43.5%
31.6%
24.9%
70.4%
29.6%
83.0%
12.8%
4.3%
45.6%
36.1%
15.2%
1.4%
1.2%
0.6%
78.1%
11.5%
6.8%
3.6%

Hino Motor
Nissan Diesel
Fujitsu Heavy Industry
Mitsubishi Motor

2.4
1.6
1.1
0.2

45.3%
30.2%
20.8%
3.8%

Source: IRC, 1999

At that time, Toyota was producing about fifteen thousand cars per day in Japan. But it would
take Aisin months to rebuild because of the requirement of procuring replacement machineryand creating a new production site. However, potentially enormous losses were largely
averted by the immediate efforts of other suppliers, from both inside and outside the Toyotagroup, to recover the P-valve supplies. While the day-to-day relationship was sole source andfortification, the response can be characterized as temporary diversification.

Aisin Seiki and Toyota immediately took measures to set up alternate production facilities ofvarying efficiency inside Aisin Seiki Group facilities that ultimately machined most of the Pvalves, before full production on the original equipment was restored (See Figure 2, based on
author’s interviews). At the same time and within just one day of the fire, other suppliers

10including those with little experience with P-valves responded to requests for help, obtainedengineering drawings and technical information from Aisin Seiki, and set up alternative
production sites and taskforces to machine the castings, which would be delivered to Aisin
Seiki. After being inspected and approved by Aisin Seiki, the castings were assembled to theother components and sent to Toyota and other clients of Aisin Seiki. The first acceptable inhouse P-valves were available in very low quantities from February 5, and from collaborating
suppliers beginning on February 7. Note that most of the P-valve castings were machined by
Aisin Seiki after the first month using less efficient methods until the original machines wererefurbished and returned to production. The temporary alternate suppliers never provided
more than about 30% of Aisin Seiki’s needs (Author interviews at Aisin Seiki).

Figure 2. Rough image of volumes supplied and recovery timeline for the Aisin Seiki disaster(Source: interviews by the authors at Aisin Seiki).

More than 200 companies participated in the collaboration for impromptu supplies ofmachined castings, and approximately 62 of these firms directly produced P-valves. Such
active collaborative efforts, including managing schedules and delivery priorities, wereorchestrated by Aisin Seiki.

By Thursday, February 6, two of Toyota’s assembly plants were reopened. On Monday,
February 10, nine days after the fire started, all Toyota group plants were back to pre-disasterproduction volumes. In all, Toyota lost only four and a half days of production, despite Aisin
Seiki’s having lost at least five weeks of production. Total loses by Aisin Seiki and Toyota

11are estimated to have been several hundred million dollars. Without the cooperation of the
suppliers, losses would surely have been much higher.

Aisin Seiki’s long-term response to this disaster was to rebuild the factory complex of sevenbuildings where the fire occurred, replacing them with one modern building extensively
equipped to prevent fires from occurring or spreading. A fire remembrance day is held eachyear on February 1 and fire drills are frequent. In 2010, Aisin Seiki transferred this factory to
ADVICS Co. Ltd, an affiliated company, to focus on other products. Today, many of thefunctions of the P-valve have been incorporated into other brake system components and only
about half as many P-valves are made each year as were made in 1997.

4. RikenIn order to (re)construct the comparative case of the Riken earthquake and disruption ofpiston ring production, we have collected information and data from various sources,
including our visit and interviews at the plant in 2010, news articles, public reports, company
press releases and data books on Riken Corporation and the 2007 Niigata Earthquake, todocument how Riken’s production of piston rings recovered after the disaster.

Riken Corporation is the largest supplier of piston rings in Japan. A piston ring is a tiny
working part in an internal combustion engine, and requires special processes and tools to
produce because its precision is essential to an engine’s efficiency and durability (see Figure3). There are only three major automotive piston ring producers in Japan.

Figure 3. Typical piston rings. Each piston usually has three rings, each of a different design andpurpose. (Source: Riken Corporation)

Since 1926 when Dr. Keikichi Ebihara of the Okochi Research Laboratory of the Institute ofPhysical and Chemical Research developed a new manufacturing method for piston rings,
which was patented and commercialized (Riken Website), Riken has specialized in piston
ring design and manufacturing technologies so that other suppliers have had difficultyemulating Riken. This situation also made it difficult for carmakers to diversify their piston

12ring purchasing sources in Japan (Nakamoto, 2007). As shown in

13

Table 2, in 2005, Riken held a 49.9% share of the automotive engine piston ring market (byquantity) in Japan, and supplied to all 12 major Japanese automobile manufacturers.

While every reciprocating engine has piston rings and they look superficially alike to a lay
person, in fact piston ring design and production are highly specialized and tailored to eachtarget engine. It takes several years of design and testing to develop suitable piston rings for agiven engine. Engine designers visit Riken frequently and interact deeply with the developersof “their” rings and the specific process equipment that will be used to make the rings for“their” engine (Authors’ interviews at Riken, 2010)14

Table 2. Monthly Supplies and Purchases of Piston Rings in Japan, in 2005
Piston Ring
Supplier

Total Production(1,000 units / Month)

Share

Manufacturer

Purchases(1,000 units / Month)

Percentage

Riken
Corporation

485.2

49.9%

Teikoku Piston
Ring

294.3

30.2%

Nippon Piston
Ring

193.6

19.9%

Honda Motor
Toyota Motor
Suzuki Motor
Mazda Motor
Nissan Motor
Fujitsu Heavy Industry
Mitsubishi Motor
Daihatsu Motor
Nissan Diesel
Mitsubishi Fuso
Isuzu Motor
Hino Motor
Toyota Motor
Daihatsu Motor
Mitsubishi Motor
Suzuki Motor
Honda Motor
Isuzu Motor
Nissan Motor
Hino Motor
Mitsubishi Fuso
Nissan Diesel
Toyota Motor
Nissan Motor
Daihatsu Motor
Mazda Motor
Isuzu Motor
Fujitsu Heavy Industry
Hino Motor
Suzuki Motor
Mitsubishi Motor
Nissan Diesel
Mitsubishi Fuso

93.3
81.2
76.1
71.4
69.2
29.2
23.9
18.8
10.9
9.4
1.0
0.9
141.3
59.3
41.6
21.3
16.5
6.5
3.0
2.4
2.3
small quantity
78.2
31.0
26.1
17.8
12.7
10.2
9.8
4.1
2.7
0.5
0.5

19.2%
16.7%
15.7%
14.7%
14.3%
6.0%
4.9%
3.9%
2.2%
1.9%
0.2%
0.2%
48.0%
20.1%
14.1%
7.2%
5.6%
2.2%
1.0%
0.8%
0.8%
0.0%
40.4%
16.0%
13.5%
9.2%
6.6%
5.3%
5.1%
2.1%
1.4%
0.3%
0.3%

Source: IRC, 2008

On July 16, 2007 at 10:13 AM, a magnitude 6.6 shallow earthquake occurred near the west
coast of Honshu, and was followed hours later by a magnitude 6.8 deep earthquake in Niigata,Japan. Riken’s piston ring production facilities in Japan, located in the city of Kashiwazaki
close to the epicenter of the earthquakes, were hard hit by the earthquake. Production ofpiston rings was completely shut down for two weeks because of the significant damage tothat plant facilities and equipment, in particular the heavier ones. Figure 4 shows theoverturned machines and spilled inventory at Riken after the earthquake. This led to an
estimated loss to the Japanese automotive industry of about 100 billion Japanese Yen, or
about US$820 million. (Arup, 2007). Riken has stated that its direct loss due to theearthquake was 1.5 billion Japanese Yen.

15

Figure 4. Damage at Riken (Source: Riken Corporation)

The larger industry losses reflect what was incurred by the downstream automakers and themany affected suppliers who were impacted by the consequent ripple effects through theautomotive supply chains. In this case, the automakers held low inventories of piston rings,
and were heavily dependent on Riken for piston ring supplies. Riken was the sole-source
supplier of the piston rings for many car models of the automakers at the time of theearthquake (Nakamoto, 2007). With Riken shut down, automakers could not manufacture
many engines and vehicles.

Toyota was forced to stop operations at all 12 of its domestic plants, and lost production of
more than 120,000 cars (Global Risk Miyamoto, 2007). According to Honda (2007), 7 plants,
including 3 for automotive production, 3 for engine production and 1 for motorcycle
production, were halted due to the piston ring production disruption at Riken.

Immediately after the shutdown, the automakers provided various forms of assistance,
including engineering and repair, to Riken. According to a Riken Corporation Press Releaseon July 19, three days after the earthquake, its customer companies including automakers aswell as equipment manufacturers had sent approximately 650 people including manyequipment engineers to help its recovery. The recovery was orchestrated by Toyota, which
utilized experience it had gained from the Kobe earthquake in order to decide what kind ofhelp was needed in what sequence. Such management and collaboration helped Riken restartits production of piston rings much more quickly than it would have been able to on its own.
Riken had its own disaster recovery plan but that proved immediately to be inadequate.
Production resumed on July 23 (Riken Corporation Press Release, 2007), within a week ofthe earthquake, and fully recovered within two weeks (Global Risk Miyamoto, 2007). Figure
5 documents the milestones in the recovery process.

16

Figure 5. Timeline of Riken Recovery (Source: Riken interviews by the authors)

After the disaster, Riken planned to spread out its production of piston rings to multiple
locations in Japan and even abroad due to the effects of this earthquake (Global Risk
Miyamoto, 2007). However, this diversification was not instituted. Instead, Riken reinforced
its buildings, anchored down its production equipment and still today produces all of its
piston rings for Japanese customers in Japan in the same buildings at and around the samesite. However, as a buffer against any future severe disruptions, it has placed about a week ofinventory nearer to its customers’ factories. Riken still provides a large fraction of theJapanese car industry’s piston rings. It has also completely rewritten its disaster recovery
manual.

5. Comparison to Other Supply Chain Disasters
In this section, we further provide brief descriptions of two other cases of supply chain
disaster and recovery in Europe. The two cases are based on interviews with company
representatives conducted by the authors’ collaborators based in Europe and public data.

5.1 Fire at a German Painting Company
In 2010, a fire destroyed two main paint lines of a German company that paints car door
handles for a supplier of handles for most German auto manufacturers. This company
painted all of the supplier’s products at that time. Because color matching is crucial for
products like automobiles, where color is part of the product’s attractiveness, it is not unusual
to use a single supplier for colored items of a given type, such as door handles. Volkswagenbought all of its door handles in Germany from this supplier while Audi, Daimler and Opel

17

procured most of theirs. The supplier makes 20 million handles per year or about 70,000 per
day using dozens of colors.

Within a few hours after the fire, the supplier’s employees were on the phone seeking
alternate painters. Competitor door handle manufacturers were asked to do the rest.
Information about colors and paint formulations had to be obtained from the painter. Special
racks for holding some types of handles also had been destroyed so their designs had to beobtained as well. The painter started up a secondary line that painted a small fraction of theneeded handles but not nearly enough. It took about three weeks to get all the colors andpaint processes set up at these alternate painters. These painters did not communicate witheach other but instead were managed by the door handle supplier. The supplier held daily
meetings to manage schedules, check paint and color quality, and dispatched employees tothe substitute painters to check on the processes, construction of new special racks, and color
accuracy. Eventually all of the logistics of painting handles and delivering them to the carcompanies was taken over by the different painters.

In some cases these painters were not equipped to use the original paint formulations, so paintmanufacturers reproduced the colors in compatible formulations. An additional barrier was
the secrecy surrounding some of the colors. Most car companies released this information
eventually but one car manufacturer would not and subsequently decided to buy its door
handles from one of the competitors who helped during the crisis. The other car companies
worked with the original supplier and, because of their flexibility regarding paintformulations, were able to get every car its handles in a relatively short period of time,
although there was a delay of about two weeks for a while. As of 2011, recovery is stillongoing and the door handle supplier has now given some of the paint work to one of theother painters who helped. While the door handle supplier feels that it was fair to all thesubstitute painters, the negotiations over compensation after the fact were not easy, and if
such a problem happens again it will try to settle compensation terms first.

5.2 Fire at Rotoflex in Switzerland
In 2005 a fire destroyed 80% of the facilities of Rotoflex, a small Swiss company that makes
special dyes for coloring flexible food packaging film. The dyes are made using flammable
volatile solvents. Fires in this industry occur often enough that other firms in the industry

18

typically go to each other’s aid. Rotoflex is still the only Swiss supplier of this kind of dyes,
which explains why it has sole source relationships with its customers. The fire was
especially threatening because 2005 was a time of consolidation in the industry, and crises
like fires are often the pretext for a takeover attempt. In fact one of Rotoflex’s first responses
to the fire was to solicit a competitor to buy them, without success. However, this competitor
agreed to help, and another volunteered without being called. Eventually surplus capacity
was found at three other companies. These agreed to start up production without any legal or
financial agreements in place but later drove hard bargains. Rotoflex survived in part due tothe loyalty of its customers.

Some special mixing equipment was destroyed so the manufacturer of the equipment worked
to build replacements on an accelerated schedule. The rest of the equipment was repaired.
The building was restored and after six months all of the manufacturing capacity was restoredplus an additional 50%, which the company installed in the hope of increasing its business.
The restored facility has greatly increased safety and fire abatement capability andsubsequent small fires have been put out quickly. The fire and recovery process was
financially draining, and the company is still paying back loans it took out at the time. It washelped by one of its chemical suppliers who advanced credit for six months.

5.3 A Brief Summary of the Cases
So far we have described two main cases in Japan in detail and two brief cases in Europe.
Table 3 summarizes the key information of the cases and illuminates some similarities anddifferences.

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Table 3. Summary and comparison of four sole-sourcing supply chain disruptions due to disasters
Customer

Case 1
Toyota, Japan

Case 2
Toyota, Japan

Case 3
Automotive parts
supplier, Germany

Supplier

Aisin Seiki, Japan

Riken, Japan

Date
Disruption

1997
Fire burned
specialized machining
equipment

2007
Earthquake knocked
over machines

Painting firm,
Germany
2010
Fire destroyed paintapplication equipment
and fixtures

Item(s) disrupted

Brake proportioning
valvesPiston rings

Car door handles forseveral car
manufacturers

Importance ofitem(s)Needed for nearly all
Toyota’s cars
assembled in Japan;
sole source
relationship for eachspecific car model
Machining of valve
castings

Needed for 27% OF
Toyota’s cars
assembled in Japan;
sole source
relationship for eachspecific car modelSpecializedmachining, heat
treating and finishing
3 year design andprocess development
needed to match ring
to engine
Tailored to piston ringprocesses – only
another piston ring
manufacturer could
do it

Painter painted 90% of
these handles for the
supplier, its customer;
total 20 million parts
per year; one solesource auto customer
Painting: dozens ofcolors; millions ofparts per year
OEM-designed parts
and OEM-specified
colorsProcesses disrupted

Product specificity

Process specificity

What was done

How long did thedisruption last

How quickly did
substitute or
recovered
operations start
Other comments

Designed for each car,dozens of types,
complex fulfillment
on JIT basis
General machining –many shops capableof the necessary
machining

Dozens of competitorsand other shops
machined them using
their own processes;
no single shop could
machine all thedifferent types ormeet the huge demand
3 months

Riken machines were
put back in place – nospare industry
capacity and no time
existed for lengthy
process development

4 days6 daysToyota continues solesource procurement ofthese parts

Toyota organized therecovery but Riken
managed theschedules andresolved priority
conflicts among its
customers

1 month withschedule disruptions
for several months

Case 4
Manufacturers oflacquers for flexible
packaging films,
EuropeRotoflex, Switzerland
2005
Fire destroyed dye
mixing andformulating
equipment and thefactory building
Manufacture of
specialized colors forflexible packaging
films
No other color
company makes thisformulation in
Switzerland; allcustomers dependent
on this company
Manufacturing ofcolors based on
flammable ingredients
Customer-specified
colors and chemicalcomposition

Many paint companies
could do it, but some
could not use the exact
paint formula needed
but provided
substitutes
Competitor paintershelped, as did paintmanufacturers; paintcompany started up asmall line that was notdamaged; initialdifficulty encountered
duplicating colors
Ongoing, but mostproduction has been
restored; sole source
not resumed
Two weeks

Several nearby
competitors are able to
do it

Recovery was
managed by the parts
supplier; some newpainting contracts
given to competitors;
one OEM defected toanother door handle
supplier

Companies in thisbusiness know thedanger of fire andoften help each other;no customers
defected; some holdup
by competitors forprice to use theirequipment

One competitor
volunteered; another
responded to a call for
help; manufacturer ofdestroyed equipment
sped up order for
replacement
equipment
6 months

Two weeks atsubstitute suppliers, 4
weeks at Rotoflex

Sources: Cases 1 and 2: public data and reports plus the authors’ interviews at the respective companies. Cases 3
and 4: public data plus telephone interviews with company representatives.

20

All of these cases involve severe disruption of one or more intentional sole source
arrangements. All include evidence that the recovery was somewhat impromptu and beganalmost immediately, that some special techniques were involved in making the affected item,
and that ingenuity was required to carry out the recovery. The only major difference is thatcase 2 (Riken) requires a process that is impractical to duplicate within the time horizon
needed, whereas in all the other cases, alternate suppliers and competitors volunteered orwere willing and able to help with temporary diversification when asked.

In particular, our two temporary diversification cases in Europe are not that different from the
Aisin Seiki case in fundamental ways. In fact, they indicate that some of the characteristics of
the Aisin Seiki case that have been deemed unique to Japan or especially praise-worthy(tightness of Japanese customer-supplier relationships, self-organizing capability,
organizational learning, practice with JIT and low-inventory systems, etc.) are more widelydistributed than may have been thought. The Aisin Seiki case is extreme in the number ofsuppliers needed, a direct consequence of the huge number of pieces needed per day and thelack of efficient substitute processes, and in turn the need for an elaborate organizational
effort. This in no way diminishes the achievement itself or the lessons it teaches about
resourcefulness in the face of crisis.

Instead, case 2 provides the exception, which offers an opportunity to reveal a “variable” ofresponse pattern. Specifically, the lost asset of Riken is sufficiently specific that nosubstitution is possible. In this aspect, the two European recoveries follow the Aisin Seiki
pattern to greater or lesser extent because the assets needed were not very specific. In the caseof the paint, it is not really generic but substitute kinds of paint could be found at substitutesuppliers. In the following, we focus our analysis on this point.

6 Discussion
6.1 Disruption Responses and Limits
Of interest is why the responses to our main case disruptions were different. In this Section,
we trace the different responses to differences in economic and technological fundamentals,

21

related to products, production methods and the benefits/costs of strategic sourcing
concentration.

In both main cases, the disrupted suppliers were the sole source of the assembler, Toyota, fora specific automotive part used in its vehicles. The essential difference is that in principle
almost any competent machine shop can, on short notice, machine the casting for a P-valvethat will satisfy the needs of the car for which it is intended. The mere fact that dozens ofcompanies, some from outside the automotive industry, could gear up so quickly is prima
facie evidence that P-valve machining is really not very difficult to learn and do correctly,
even though most of the responding companies had difficulties for the first day or two. Suchdifficulties are in fact not that unusual in typical production ramp-ups. However, it is notpossible for anyone, even another piston ring manufacturer, to make, on short notice, a piston
ring that will function properly with a given engine. Piston rings and engines are co-designed
over a period of approximately two to three years with constant and close coordination
between their respective designers to develop the correct design and manufacturing technique,and to verify that the final output on the full-volume line precisely meets the design
requirements (Authors’ interviews at Riken, 2010).

A P-valve’s manufacturing method and process are rather independent of a car, whereas thedesign of a P-valve is coupled to the design of a specific car. Coupling of car and P-valve
gives rise to small differences in shape and interfaces that do not affect the manufacturing
technique in principle. In relief from the fire in 1997, the substitute suppliers indeed did not
use Aisin Seiki’s maching methods or achieve its low costs, flexibility, and high volumes.
But machining for P-valves is generic enough that alternate methods, with different capability
for volume-variety combinations, can be learned very quickly (hours or days). In response to
the disruption, many alternate suppliers were needed due to the huge volume and variety
needed, and the relative inefficiency of the alternate methods the different suppliers had touse. No single alternate supplier necessarily had to, or perhaps even could, provide all thedifferent types or the whole quantity needed of each type.

The unspecific nature of P-valve’ production methods/processes and the ease of substituting
suppliers on short notice would seem to be atypical of manufactured parts. In automobiles,
we can think of commodity fasteners as among the least specific parts used. Tires are often
substitutable because their sizes and internal construction are somewhat standardized. But
22

nearly everything else, from alternators and radiators to seats and dashboards, are designed
specifically for a given car. Even if capable manufacturers exist for each of these kinds ofitems, the differences between parts that make them suitable for a given car require months or
years to develop in each case. Temporary diversification for high-volume/high-variety parts
on short notice after a disaster is likely to be only rarely possible.

Temporary diversification is impossible with a part like a piston ring. Piston rings are among
the most specific parts in a car due to the tight coupling of their design and manufacturingmethod to their intended engine. This coupling makes it impractical not only to findsubstitute suppliers after a disruption but also to create multiple suppliers a priori by dividing
the supply of piston rings for one engine among two or more suppliers because of the expense
and time required to duplicate the lengthy design process and validation of correct
manufacturing methods. This creates quite high asset specificity (Williamson, 1981; 1985)
between the supplier and assembler. Asset specificity is an important concept in the economic
and transaction cost literature. High asset specificity makes it difficult to obtain or learn
capabilities quickly when needed. The historical evolution of the piston ring industry in Japanfurther reduces the possibilities for temporary multiple sourcing, there being only threecompanies in Japan that can mass produce piston rings for automobiles.

In addition, luck played a large role in both cases. Had the fire occurred in the next-doorbuilding where Aisin Seiki made most of its brake master cylinders, the observed rapid
response would have been even harder to achieve due to the more difficult maching steps
required for master cylinders (Author interviews at Aisin Seiki). Similarly, had theearthquake measured 9.0 (as in the earthquake in March 2011) instead of 6.6, the damage to
Riken’s specialized machines might have been permanent rather than temporary, causing
many months of disruption.

None of the companies involved has changed its basic policies. Toyota’s supply chain
strategy maintains sole-sourcing and long-term relationships with suppliers, and Toyota reaps
both design synergies and operational benefits. ADVICS (Aisin Seiki’s successor company
for P-valve production) still supplies nearly all of Toyota’s P-valves, and Riken has not built
another piston ring plant in Japan. While earthquakes cannot be prevented, they rarely strikewith devastating effects (an increase of 1 in magnitude means a decrease in likelihood by afactor of 10) and usually only at long intervals in any one region of less than a few 10’s of km
23

in diameter. Defending against a truly devastating earthquake or widespread conflagration
would require so much inventory or slack alternate reserve capacity that it would never be
economically attractive. Instead, as the response to the March 2011 earthquake shows,intense recovery efforts are the only practical method.

6.2 General supply chain strategy and perseverance in fortification
The juxtaposition of the Aisin Seiki and Riken cases provides an opportunity to compare
disaster responses when supply chain strategies are nearly the same. For normal operations,Toyota, Aisin Seiki, and Riken used fortification as the general sourcing strategy, and still doso after the respective disruption events. In our interviews with them, all three companies
cited the benefits of this apparently risky choice.

In the case of automotive piston rings for which specificity is the key to product andoperational excellence, diversification may impose operational and organizational complexityand loss of value (quality, cost and delivery) achievable from concentration, and thus adisadvantage vis-à-vis the competitors which adopt concentration for the item. The piston
ring industry as a whole is highly concentrated in Japan (see Table 2). In fact, U.S. car
manufacturers also adopt the single source strategy for the piston rings of a given engine eventhough there are more available U.S. suppliers.

In the case of P-valves, the relatively low asset specificity required for machining them andthe successful temporary diversification in Aisin Seiki recovery may drive one to consider
supply diversification for the item even during normal days, which can potentially mitigate
the risk of supply disruption, reduce the cost of restoration and the loss in revenue. Simply
put, for P-valves, supply diversification is a feasible choice but not taken by Toyota for dayto-day operations. Why?

Generally, fortified supply can reinforce the alignment of product design and manufacturingmethod, foster mutual learning about these alignments, and create scale economies.
Specifically, in the case of Toyota’s sourcing of P-valves, because Toyota cars use a hugevariety of P-valves, the supplier that outperforms competitors must have effectively
combined operational efficiency with flexibility. To address Toyota’s variety needs, Aisin
Seiki developed and applied flexible equipment with low or zero change over costs, with the24ability to meet Toyota’s JIT requirements. Despite being capable of making a P-valve, noother machine shop than Aisin Seiki could do this complex fulfillment when Toyota
increased its variety of P-valves over time. This gave Aisin Seiki an unbeatable costadvantage over available competitors so it had by 1997 won almost all of Toyota’s businessfor P-valves in Japan.

Aisin Seiki indeed developed specific assets, as did Riken. The difference is that thetemporary alternate suppliers of P-valves did not need to duplicate Aisin-Seiki’s specificassets but could each provide some of the required types and quantities of some P-valvesusing their own machining assets and methods (same in the two European cases). Because
these alternate assets were relatively inefficient, many substitute suppliers were needed. The
Mikawa region of Japan, where Toyota and Aisin Seiki are located, is rich in machine shops
due to the nearby presence of Toyota, Mitsubishi Motors, and the region’s heritage as acenter of aircraft production in past decades.

In summary, diversification is relatively easier to apply to assets that require less specificcapabilities and are readily available from alternate sources. Aisin Seiki’s P-valves fall into
this category. Diversification is more difficult to apply to specialized assets or those with few
alternate sources. Riken’s piston rings fall into this category. However, Toyota used and stilluses fortification rather than diversification for day-to-day supplies of both cases, with thebelief that long-term benefits of learning, quality, and efficiency from it far outweigh therisks.

7 Conclusions
In this paper, we have sought to understand similarities and differences of two disruption
response cases in Japan, plus two in Europe, and relate them to known bodies of economic
theory. The main conclusion is that asset specificity required in the manufacturing methods
and processes of a disrupted item or process constrain the range of responses to supply chain
disasters. Yet we find that Toyota (as well as other lean manufacturers) persists in a
fortification strategy for sourcing, because of the belief that long-term strategic benefits offortification will outweigh the risks of disruption. We suspect that relatively few items inmost competitive industries are generic enough in production methods that temporary25

impromptu diversification will be possible. Thus the Riken-type response may be more likely
to be the one that emerges after disasters rather than the Aisin Seiki type.

This research contributes to the supply chain risk management literature by identifying the
economic-technical factors that influence the possible responses to disruption. For
practitioners, unawareness of the fundamental limits to temporary diversification or being
overly optimistic about its availability may result in insufficient or inappropriate disaster
preparedness. Therefore, it is important for supply chain managers to understand the extended
range of responses available to recover a disrupted supply chain, and, particularly, theenablers (and constraints) to different responses. In this paper, asset specificity is identified assuch a factor.

To advance understanding further, additional cases (more countries, more industries, andmore products) will be desirable. Comparing more examples will allow us to illuminate more
response alternatives to supply chain disasters and any hidden factors, which may influence
the responses but were not revealed by the cases in the present paper.

Acknowledgements
We thank Aisin Seiki and Riken for cooperation, interviews and knowledge sharing. Takahiro
Fujimoto and Takuken Li pointed us to Noriaki Oba, who introduced us to M. Yoshida,
whose kind facilitation and accompaniment made our first visit to Aisin Seiki possible.
Hidetada Higashi, Shintaro Ishizaki, and Maria Carmen Perez accompanied us on visits to
Aisin Seiki and compiled our notes. M. Mohko kindly facilitated and accompanied our visit
to Riken. Philipp Mayrl also accompanied the authors’ visits and took several of the pictures
used in this paper. Jan Rys conducted telephone interviews that provide the information for
the two cases in Europe.

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