Sunday, March 27, 2011

Would Proper Risk Assessment and Management Have Minimized the Damage to Japan?

The New York Times in a provocative article is raising the question of whether attention to risk assessment for nuclear power plants in Japan might have reduced the scale of the damage from the triple earthquake-tsunami-nuclear disaster. The article even highlights that Japanese engineers focused on deterministic as opposed to probabilistic approaches in determining the safety of the associated engineering structures. According to the article, over the decades, preparedness against tsunamis never became a priority for Japan’s power companies or nuclear regulators. They were perhaps lulled, experts said, by the fact that no tsunami (itself a Japanese word) had struck a nuclear plant until two weeks ago. Even though tsunami simulations offered new ways to assess the risks of tsunamis, plant operators made few changes at their aging facilities, and nuclear regulators did not press them.

Also, engineers took a similar approach with earthquakes. According to Masaru Kobayashi, an expert on quake resistance at the Nuclear and Industrial Safety Agency, Japan’s nuclear regulator, "When it came to designing the Fukushima plant, official records dating from 1600 showed that the strongest earthquakes off the coast of present-day Fukushima Prefecture had registered between magnitude 7.0 and 8.0." We all know that the earthquake that struck Japan on March 11, 2011, has now been upgraded from an 8.9 earthquake to a 9.0 one.

The Times article stated: For whatever reasons — whether cultural, historical or simply financial — Japanese engineers working on nuclear plants continued to predict what they believed were maximum earthquakes based on records. Those methods, however, did not take into account serious uncertainties such as faults that had not been discovered or earthquakes that were gigantic but rare, said Greg Hardy, a US-based structural engineer.

Indeed, in the West, risk management and assessment has become a focus not only of engineering studies and analyses but also a critical component of business decision-making. Drawn from techniques in finance, probability, and, I would add, optimization and decision-making under uncertainty, risk management has been integrated with design and analysis with a notable body of literature now in existence especially in the area of global supply chains (clearly also impacted by the Japanese set of disasters).

As a faculty member in the Department of Finance and Operations Management at the Isenberg School at UMass Amherst, I have been researching, along with my students and associated colleagues, risk management in different network systems from transportation and logistic ones to economic and financial ones. Our research on the integration of risk management and decision-making under uncertainty with complex networks began over half a decade ago and has yielded publications such as:

Supply Chain Networks, Electronic Commerce, and Supply Side and Demand Side Risk
Anna Nagurney, Jose Cruz, June Dong, and Ding Zhang, European Journal of Operational Research 26: (2005) pp 120-142.

Multitiered Supply Chain Networks: Multicriteria Decision–Making under Uncertainty
Dong, Ding Zhang, Hong Yan, and Anna Nagurney, Annals of Operations Research 135: (2005) pp 155-178.

Global Supply Chain Network Dynamics with Multicriteria Decision-Making Under Risk and Uncertainty
Anna Nagurney and Dmytro Matsypura, Transportation Research E 41: (2005) pp 585-612.

Financial Networks with Intermediation: Risk Management with Variable Weights
Anna Nagurney and Ke Ke, European Journal of Operational Research 172: (2006) pp 40-63.

Modeling of Supply Chain Risk Under Disruptions with Performance Measurement and Robustness Analysis
Qiang Qiang, Anna Nagurney, and June Dong, in Managing Supply Chain Risk and Vulnerability: Tools and Methods for Supply Chain Decision Makers, T. Wu and J. Blackhurst, Editors, Springer, Berlin, Germany (2009) pp 91-111.

Supply Chain Outsourcing Under Exchange Rate Risk and Competition
Zugang Liu and Anna Nagurney, Omega 39: (2011) pp 539-549.

Risk Reduction and Cost Synergy in Mergers and Acquisitions via Supply Chain Network Integration
Zugang Liu and Anna Nagurney, to appear in the Journal of Financial Decision Making.

Supply Chain Network Design for Critical Needs with Outsourcing
Anna Nagurney, Min Yu, and Qiang Qiang, Papers in Regional Science 90: (2011) pp 123-142.

Only with the right methodological and analytical tools can we assess risk and prepare appropriately for emergencies and disasters!