Enterprise Risk Management and tuxedo black

In March 2011, the R9.0 magnitude Tohoku earthquake and tsunami devastated the northeast coast of Japan. The radiation levels around the damaged Fukushima Daiichi nuclear power plant meant that a zone within a 20km radius of the plant was evacuated. Among the businesses impacted was Merck’s Onahama factory, the only plant in the world to make Xirallic pigments for the automotive industry. For a time, it was not possible to buy a high sheen black Ford because metallic tuxedo black was ‘temporarily unavailable’ since it was manufactured using Xirallic pigments from the now evacuated plant.

​The world’s top automakers, including Ford, Chrysler, Volkswagen, BMW, Toyota and GM were left stranded. How could this happen?

No-one had anticipated that the choice of colours and paint finish, used by these major motor vehicle manufacturers, would become an issue.

• The pigment supply used by all six automakers came from just one manufacturing plant in Japan’s Sendai region.
• This in itself would not have been cause for concern had it not been for the fact that the plant was located within a 20km radius of the Fukushima Daiichi nuclear power plant.
• Which in turn should not have been of concern unless there was radiation leakage due to a meltdown in one or more of the reactors at the plant.
• Which in turn should not have been a concern unless a tsunami of significant size could destroy the emergency generators that provided cooling for the fuel reactors.
• And unfortunately, that is exactly what happened when the R9.0 magnitude Tohoku earthquake occurred off the coast of Japan on 11 March 2011.

This example highlights the challenges enterprises face in managing risk especially for circumstances like the 2011 Tohoku earthquake. If the earthquake hadn’t have happened it is doubtful that anyone would have identified this particular set of circumstances, let alone consider it likely enough to justify conducting further analysis, evaluation and treatment.  

No enterprise is risk free.

In a previous blog ‘ignore being prepared at your peril’, I reported that 11% of Christchurch city businesses within the red-zone failed to survive the disruption caused during the earthquakes that began in September 2010. A further 64% of those businesses were forced to close temporarily. Yet If all Christchurch businesses within the red zone had established contingency plans to secure their operations without being able to access their physical premises for 16 days, then they would likely have survived the earthquakes and still be in business today.

In ‘Takata airbags: the slow train wreck – 3 years on’, I described how the supplier of a single component from one factory can disrupt the automotive industry and affect the recall of 42 million vehicles across over 20 brands. By October 2016, faulty airbags had been linked to over 100 injuries and 11 deaths from inflator shrapnel hitting the people that should have been protected when the inflator was activated.

These examples highlight the wide range of events and activities with different uncertainties that need to be controlled for an enterprise to achieve its objectives.  The international standard ISO 31000: Risk Management—Principles and Guidelines, provides a framework from which all enterprise risks including those from events like earthquakes, or faulty components like airbag inflators may be identified, analysed, evaluated, and treated in a systematic manner. To achieve role model levels of performance, an enterprise needs to take a holistic strategic approach to manage risk. Leaders must oversee their appetite and tolerance for risk.

All organisations need to take risks to be successful. Deciding which risks are intelligent and worth taking needs to be carefully considered and can mean the difference between extinction, survival, or role-model performance. There is a fine balance between becoming a role model and failing. Leaders need to use all their navigation skills to build a successful organisation for the long term. 

​On a final note, as you apply your standard risk assessment process, just remember that you may not want to account for all events in a linear way. Nassim Taleb, see ‘Beware those Black Swans’, believes that many events are undirected and unpredictable where you cannot use a normal distribution model as a basis to calculate risk. Using Nassim Taleb terminology events such as the Tohoku and Christchurch earthquakes may be better considered as black swans.