The Japanese earthquake has demonstrated the vulnerability of modern extended supply chains
Five weeks after the earthquake and ensuing tsunami hit the north eastern coast of Japan, carmakers in the region were still struggling to produce cars. One reason is the lack of power caused by the damage caused to the nuclear reactor, but of more worrying long-term concern is the lack of components from an ailing supply chain.
But it is not just manufacturers in the region who are struggling with inventory, the backlash is being felt all around the globe; the reasons being intricate interwoven supply chains and globalisation. According to Professor Richard Wilding, professor of supply chain strategy at Cranfield Business School, the situation will not improve any time soon.
'It is definitely not going to disappear next week,' he says. 'It is going to be a couple of months until supply chains configure themselves appropriately and in some industries even several years.'
Honda has announced that it has extended the suspension of finished vehicle production at its Sayama and Suzuka plants, and even then it plans to operate at only 50 per cent capacity. The third-largest automaker in Japan says that it has almost completed the repair and inspection work at its Tochigi plant in Tochigi prefecture, however, it has decided to transfer some functions such as car development and procurement out of the research and development (R&D) facilities in Tochigi to its other plants such as those in Sayama, Suzuka, and Wako.
Suzuki temporarily restarted vehicle production at its Kosai, Iwata, and Sagara plants in Japan, but lack of parts caused them to close again a week later, while Mitsubishi has suspended production at its plant in Okayama prefecture.
Toyota is putting all its emphasis on resuming production of three hybrid models but it has postponed the launch of the Prius wagon and minivan hybrid. The company has already extended production shutdowns at all of its assembly plants in Japan.
The expected delay in the resumption of deliveries of components by Japanese suppliers is threatening the global supply chain. Toyota has hinted at the possibility of further production cuts at its facilities in North America. Nissan, meanwhile, believes that the conditions of suppliers in the earthquake and tsunami-affected areas are worse than may appear.
However, the impact is not limited to the Japanese companies. Most automakers source components from Japanese suppliers and the disruption to the supply chain has hit the production schedules of even non-Japanese automakers. Supplies of plastics, rubber, and electronics components are reported to be falling short and this could disrupt the production schedules of several automakers. Global automakers including General Motors (GM) and PSA Peugeot-Citroën have either announced production cuts or are in the process of reducing production in the US and Europe.
The supply of airflow sensors, for example, has come under heavy pressure after a Hitachi Automotive plant was badly damaged. Hitachi Automotive makes the sensors at a plant in Sawa in Ibaraki prefecture and is responsible for a share of around 60 per cent of airflow sensor supplies to all leading automakers, including Ford, GM, Renault-Nissan, Toyota, and Volkswagen.
'We are seeing a big knock-on effects on various things such as the air sensors that go into diesel engines – these are manufactured by Bosch and Hitachi,' Wilding says. 'Bosch is of course Europe-based, but Hitachi is Japan-based and there has been a major disruption in its manufacturing capabilities that has had a major effects across multiple different automotive organisations including Peugeot Citroën on their diesel engines.
'You are starting to see ripples coming out in the automotive sector. Toyota are focusing on the hybrid technology and trying to get those facilities up and running because demand for those products is far greater. What we are seeing is impact at both component level and finished goods level.'
The problem is that modern supply chains are both spread out around the globe and interconnected. 'We are now dealing with networks and it is like a fly hitting a spider's web sending ripples out across the whole network,' he adds.
'You have to remember that competition is no longer between individual companies, but the supply chains that they are part of. If you have reconfigured the supply chain and then two suppliers have been affected, you are going to struggle because you are no longer going to be able to maintain your competitive advantage. Some people may have been lucky and had slightly differently configured supply chains and therefore may be more successful in this situation.'
The plan for supply chains is to have multiple sources for each component but in reality that is often difficult. In practice what often happens is that even if an automotive manufacturer uses two suppliers, those two suppliers may be sourcing components from one supplier.
One example from a few years ago occurred after a fire in the Phillips manufacturing facility that made microchips used in mobile phones. The facility was a major global source and was completely closed down. Even though on the face of it there was a choice of suppliers for consumers; they could choose a Nokia or an Ericson, the core component came from this one location.
'Nokia realised that there was a big issue and were able to reconfigure their product and went global to source components,' Wilding says. 'They hired executive jets to visit appropriate companies who could supply the component.
'Even if the automotive manufacturers have two sources of supply – what about the second tier suppliers? You may find that one of the second, or even third-tier, suppliers is common to both supply chains.'
Agile and lean
The ability to recover from a disruption requires a supply chain that is both agile and transparent. 'Agility means that you have flexibility throughout the supply chain environment,' Wilding says. 'You need to have an element of leanness to be resilient, but what you have to be very careful about is becoming 'anorexic' lean.
'Many companies become anorexic when they are going through the lean process, which then results in a business which is starved. So when they go through an event such as this they don't have any spare resource to be able to cope with it.'
For all the advantages that sourcing components from low-cost economies offers to western manufacturers, the disadvantage is an increase in risk. If there was no global supply chain an event in Japan would have very little impact.
One recent trend that has increased the risk is the growth of focused facilities, where one factory will produce the entire region's source of that product, or in extreme circumstances the entire global source.
When developing a supply chain risk management strategy there are some significant things that need to be considered. 'The structuring of your supply chain is key,' Wilding says. 'Where do you source from? How do you develop your suppliers? You also need to take into account the level of understanding that you have. You need to map and understand the supply chain risks.
'The next critical thing to collaborate effectively to make sustainable supply chains and identify the appropriate relationships to have with the appropriate suppliers.'
Then comes the question of agility, ensuring that the supply chain has high levels of transparency. But all the while the focus needs to be on creating a flexible supply chain. Finally, it is essential to create a supply chain risk-management culture within the company so that when people make a decision on suppliers they understand how it will affect the risk profile of the supply chain as a whole. 'If you are making a procurement decision to go global you need to recognise that your cash to cash cycles are going to increase by about 11 weeks, you are going to have to carry more inventory,' Wilding says. 'There are all sorts of implications with greater risks.'
Making a map
To deliver a transparent supply chain it is vital to create a map. The key things to understand are the four key areas of supply chain strategy – process design, infrastructure design, information system design and the organisation, which is actually how you get your people and create values in the supply chain.
'For example, if you decided that you were going to have an ethical product there is no point you sitting in the UK saying we are being ethical if your suppliers are exploiting child labour,' Wilding explains. 'So effectively through the organisation element you have to try and create a value system, almost create a society with aligned values within the supply network.
'Those four elements come together and you need to have a good understanding of them. There are a variety of techniques that enable you to do this. The key thing is that it has to have – in times like now – very accessible maps. You can go into a lot of detail when mapping.
'You need to be able to explain the structure of the supply chain within 15 minutes. So it needs to be on one piece of paper written in such a way that everyone can understand it.
'I often ask companies if they have their supply chain documented and they say that they have. On one occasion when I asked to see it I was told that it was in eight volumes – not exactly 'transparent'.
'When a problem occurs there is no time to read through eight volumes to discover what is going wrong, it needs to be on something that you can understand quickly and get people collaborating on.'
Despite the extended disruption, Wilding believes that the supply chains have coped as well as could be expected. 'What you are finding is that it is multiple industries that have been severely disrupted,' he says. 'What that demonstrates is the interconnectivity of the different types of supply chain.' *