Carmakers told: Don't hoard, distribute

Business analyst and research consultancy Frost & Sullivan has warned manufacturers not to move away from lean inventory and just-in-time delivery and production processes, even in the wake of a number of well-documented disasters this year that have hit the automotive supply chain, such as the earthquake and tsunami in Japan, disruptions in North Africa and the ongoing floods in Thailand.

 

There have indeed been some signs in the industry that carmakers are looking to their suppliers to increase inventory or consignment stock. In September, Toyota asked its tier suppliers to hold additional months of inventory and invest in the development of technology that would provide more options for parts and materials, part of “a pragmatic approach” to just-in-time that is always necessary according to the company. The move was part of a three-point strategy designed to limit future disruption to the supply of parts following the Tohoku earthquake (read more here)

 

Toyota has sought to address the serious bottlenecks that occurred following the disaster in March. In particular, the event revealed a fissure between many carmakers’ tier one and its lower tier suppliers, most of which tend to be more concentrated by specialisation and region. The result was that even if an OEM had multiple tier one sources, those tier ones were likely to share the same lower tier suppliers, and thus be equally impacted by disruptions to supply.

 

Toyota has said it is establishing a system to track bottlenecks down to the second tier, especially for special materials, and it is tackling those bottlenecks in two ways: by instilling a need for disaster prevention and response methods throughout the tier levels and by creating safety stock. For example, Toyota has asked suppliers to carry an inventory of certain parts that were not dependent on automotive engineering, such as electronic subcomponents.

 

But despite these efforts the carmaker was still unable to maintain a sufficient level of inventory for when the Thai floods hit, again bringing disruption to supply.

 

Frost & Sullivan suggested that forcing more inventory on suppliers is problematic to begin with since many suppliers are still dealing with a volatile market, poor financial forecasts and working in a climate of total supply chain cost reductions, making investments in the handling and storage of additional inventory difficult. Instead, Gopal recommended a more diverse sourcing strategy.

 

“It is wiser to plan for inputs from diverse sources than hoard. In the longer term, we will realize [that] the cost benefit of distributed or leveraged sourcing will far outweigh hoarding,” he said.

 

In terms of ensuring a greater availability of parts from several locations, Toyota has also been calling for a greater standardisation of parts between carmakers, enabling them to share common components that can be manufactured in several locations.

 

It is also aiming to make each region in which it manufactures independent in its parts procurement. Toyota said it is already regionalised in the supply chain in North America and Europe to above 80% of content but that for some parts it is still better to produce in Japan.

 

“For these we may need to sacrifice a little in terms of efficiency by making these items in more than one place, to hedge the risk,” said spokesman for Toyota Motor Europe, Jean-Yves Jault.

 

But manufacturers and LSPs also need to work on a more dynamic forecasting model, said Gopal.

 

“Demand forecasting is still deterministic and routine across various manufacturing segments,” he said, something that fails to account for unfavourable economic and natural scenarios. Gopal said it is essential to bring in “stochastic scenario planning”– randomly determined planning that incorporate risk, for example–to ensure preventive steps are taken in the supply chain ahead of a crisis, rather than subsequent remedial action.

 

Risk strategies are part of business planning at Nissan and, while it was unwilling to discuss details of its supply chain strategy, the company’s chief operating officer, Toshiyuki Shiga has said that after the earthquake and tsunami in March, its risk management involved working with tier one and tier two suppliers on business continuity planning.

 

“No matter where we make our parts, there is an element of risk, and scenarios of various risks are considered to maintain a competitive supply chain,” he said in a recent statement.

 

Shiga went on to say that since the earthquake, it was more important than ever for the company to avoid and minimise risks and inconvenience by having supply chain management and purchasing working together across borders through cross-functional and cross-regional teams. “To minimise the impact of the Thai floods on production we are working on a global level in Thailand and in Japan."

At Toyota, too, natural crises are built into risk models; the company has pointed to standardisation as one of the keys methods of dealing with it.

 

“We are focussing on standardisation and other methods so that we are ready, eventually, to achieve recovery from such disaster in two weeks,” said Jault. “It will take us two to three years to get firmly underway, and about five for everything to be really in place.”

 

“Regarding economic trends forecasting,” he added “[that is] another matter of course, but that's not fundamentally changed as a result of the natural catastrophes of late.”