The Eyjafjallajokull Effect

It is a mouthful, the Eyjafjallajokull Volcano in Iceland.  More than hard to pronounce, this volcano has disrupted air traffic in and around Europe for almost two weeks.  The news was rife with reports about how much these delays have cost the airlines and the impact it has had on the economy of the UK, the country most affected.  There are stories of how the volcano cloud has the potential cool the climate globally depending on how long the eruption lasts.  The last time Eyjafjallajokull erupted, in 1821, the eruption lasted for almost two years.

There was a report on NPR on fruit shipments bound for the UK being delayed in South Africa.  This volcano has the potential to have a big impact on the globe and global economy.  If there is a prolonged eruption with ash clouds wafting over Europe for months, one wonders what the effect would be on commerce.  This volcano and the widespread ash plume over northwestern Europe is a reminder of just how interconnected the world is.  The delays in air travel have already had a huge impact on global commerce.

At Cadent Resources, we have developed a model for looking at the Supply Chain called Supply Chain Physics.  The Eyjafjallajokull Volcano changed the physics of the supply chain in Europe.  Air freight was very simply eliminated for seven to ten days.  The Law of Constraints was dramatically compromised and everyone was scurrying about trying to fix what in the short term could not really be fixed.  Passengers were stranded, goods could not be shipped, and revenue was lost by airlines and companies that did not receive their goods.  The estimates on the economic impact of this volcano have ranged, in my scant survey, from $1 to 3.3 Billion

The problem was that flights went from a full and robust schedule to zero in an instant.  The capacity constraint for this channel of freight and passenger service evaporated.  The people and goods dependent on that channel of transportation were immediately stranded.  There were alternatives buses, trains, cars/trucks, and ships.  But there was not any instant capacity in these other channels readily available nor could any of other modes provide the timeliness of the airlines.  People and goods were stranded.

The earthquakes in Chile and Haiti were certainly horrible.  The human loss and rebuilding cost, especially in Haiti, are staggering but the economic impact for the most part were localized.  The Eyjafjallajokull Volcano was like 9-11 in terms of disrupting commerce on a large scale.  The scale in such case is so large, there is no alternatives, no slack in the constraint.  The airfreight and passenger airline capacity went to zero.  Demand stayed steady and backlogs grew.  Other channels cannot provide any or enough extra capacity to make any real difference in the short term.

There are clear facts (well my opinion more than facts) about global supply chains made evident by this Eyjafjallajokull event:

1. Good News:  Supply chains work.  Goods ship all over the world with impressive efficiency.


2. Not so Good News:  There is little room for error.  When an Eyjafjallajokull like crisis event occurs, the Law of Constraints go to zero in certain segments and businesses dependent on those segments are impacted.


3. Good News:  Thankfully, there are not a lot of show stopping events like Eyjafjallajokull.