Are supply chains too lean?

All over the world, supply chains have become too thin, and not just in automotive. This trend has been evidenced by pandemic-induced shortages of virtually everything – medicines, medical equipment, building materials, even toilet paper. The chip shortage alone is expected to impact global auto sales by 1.3 million units in 2022.

The problems driving these shortages show no signs of abating. The recent blockade of the Detroit/Windsor Bridge, the war in Ukraine, the onboard fire and the sinking of the freighter Felicity Ace carrying 4,000 VW Group cars – each a kind of black swan – further underscore the need to rethink resilience of the supply chain. strategies and risk management.

In a recent Automotive News article, Carla Bailo, CEO of the Center for Automotive Research (CAR) in Ann Arbor, Michigan, said, “We don’t expect this to continue to happen, but you never know. This is what makes risk management so important and also so difficult.

How did we come here?

In the early 1980s, production planners and sourcing specialists bought their inventory freely, as there was constant demand from the hungry production lines struggling to keep up with the booming market demand. However, when the economic cycle slowed, manufacturers suddenly found themselves stuck with large inventories, and the pendulum immediately swung in the opposite direction.

The Toyota production system and its just-in-time (JIT) and lean concepts have become the gospel of manufacturing, especially in the automotive industry.

While JIT and lean are important approaches to efficient manufacturing, could it be that the lean approach, in particular, has been taken to extremes? In pursuit of greater efficiency and lower costs, have we changed the equation so much that the risk/reward ratio has become significantly unbalanced?

Overextended supply chains, sole sourcing, overzealous inventory management, and lean manufacturing are all culprits of getting us where we are today. In particular, a one-time supply and near-zero safety stock can significantly increase the risk of line downtime due to an unforeseen supply chain issue.

As recently as March 1, Toyota had to shut down 28 lines at 14 Japanese factories due to a cyberattack on supplier Kojima Industries. Maybe a little fat in the supply chain diet – especially for the critical parts – might not be such a bad idea after all.

Of course, adding “grease” – i.e. buffer – to a supply chain comes with increased financial impacts, as well as a potential risk of obsolescence, according to the article. Therefore, this course of action must be weighed against the potential benefits in terms of resilience and maintaining customer commitments. Better demand forecasting data, deep visibility into supply levels, coverage and buffering – these are all tools that can be deployed. But it all boils down to this: companies must constantly assess and adjust their supply chain strategies to respond to – and ideally, anticipate – potential constraints, while simultaneously ensuring that they remain competitive on performance metrics. keys.

Another strategy is to shorten supply chains, which in automotive stretch precariously around the world, causing the slightest hiccup to reverberate like a destructive shockwave. According to Laurie Harbour, CEO of supplier consultancy Harbor Results, “If you’re not buying where you’re building, then understand the risks associated with it.”

Industry culture also bears some responsibility for the fragility of automotive supply chains. Typically, OEMs wielded enormous power to force suppliers to operate on the thinnest margins, as they themselves had to fight hard for every dollar of profitability. They also did not allow vendors to pass on any unforeseen cost increases to them, further tightening the noose on vendors.

Of course, the pandemic has changed that, with vehicle inventories at historic lows and prices at record highs. However, under “normal” (i.e. pre-pandemic) conditions, major suppliers have also been guilty of similar pressures on their own suppliers, with a cascade of brutal cost pressures across the board. of supply.

The whole dynamic between OEMs and suppliers has been characterized by a lack of trust and transparency and, in many cases, an almost adversarial relationship. If anything good can be said to have come out of the COVID pandemic, it may be that it has forced OEMs and suppliers to realize their mutual interdependence and work towards greater collaboration. and confidence.

In addition, OEMs and large suppliers have the additional responsibility to invest more in supplier development and to go beyond mere expression of the notion of partnership.

While there is hope that some of the lessons learned from the pandemic, in terms of supply chain strategies and supplier relationships, will become institutionalized in the culture of the automotive industry, an additional dose of vigilance is recommended to avoid falling back into old habits, which has been the pattern in the past.

To quote Sunil Chopra, professor of operations management and information systems at Northwestern University’s Kellogg School of Management, “We’re going to see an increase in the number of companies talking about diversification. But as this fades into memory, decision makers will only take into account disruptive events to the extent that they should. … In six months they will rule out the risk again.”

There is a plot twist in this quote, however; it was said in 2011, after the Fukushima earthquake in Japan severely disrupted many industries, including automotive. At the time, Professor Chopra said that at most automakers and Tier 1 suppliers, little change after supply chain disruptions. Once completed, automakers and suppliers resume business as usual until the next earthquake, tsunami, flood, strike or other event (such as a pandemic) causes further disruption to the supply chain.

Will history repeat itself?

Marjorie N. McClure