Sunday, April 03, 2011

Risk of efficiency

Crisis often unveils unexpected connection of the system. Japan's earthquake buffeted the world's supply chain known for its efficiency characterized by the just-in-time delivery system.

Japanese makers have core technologies in many goods. Nihon seikojo dominates market of the pressure container for nuclear plants. Some chemical makers damaged in the earthquake provides special devices for computers and mobile phones. Now prices of those devices are soaring not only because of the lower mid-term supply but also because of its supply chain with low inventory.

The case could give us some insight on the importance of slack. Perfect systems work perfectly in normal days, but when the regime changes it gets significantly prone to the outside shocks. We'd better to hedge some risk, and as finance theory tells to us, the optimal hedge ratio lies between the both extremes.

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