Are supply chains too lean?

 Supply chains everywhere have become too lean, and not just in automotive. This trend was highlighted by pandemic-driven shortages in virtually everything—medicines and medical equipment, construction supplies, even toilet paper. The worldwide chip shortage alone is projected to impact global automotive sales by 1.3 million units in 2022.

The issues behind these shortages show no signs of abating. Ongoing Brexit-related challenges, the war in Ukraine, and the fire aboard and subsequent sinking of the Felicity Ace cargo ship transporting 4,000 VW Group cars—each one in itself an unexpected event with potentially catastrophic consequences—further underscore the need to rethink supply chain resilience strategies and risk management. While industry commentators certainly don’t expect such catastrophic events to keep reoccurring, if the last two years have taught us anything, it is to always expect the unexpected and never say never. For the automotive sector in particular, this is what makes risk management not only important but difficult as well.

How did we get here?

In the early 1980s, production planners and procurement specialists purchased inventory freely, responding to the constant demand from hungry production lines that were straining to meet booming market demand right across the globe. However, when the economic cycle slowed, manufacturers found themselves suddenly 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 became manufacturing gospel—especially in automotive.

While JIT and lean are important approaches for efficient manufacturing, the lean approach, in particular, may have been taken to risky extremes. In pursuit of greater efficiency and reduced costs, has the equation changed to such an extent that the risk/reward ratio has become significantly out of balance?

Overextended supply chains, reliance on single sourcing, overzealous inventory management and lean manufacturing all contributed to the current situation. In particular, single sourcing and near-zero safety stock can dramatically increase the risk of a line shutdown as a result of an unanticipated supply chain issue. As recently as the start of March, Toyota had to shut down 28 lines at 14 Japanese plants due to a cyberattack on supplier Kojima Industries, leading the business to announce it would be ‘strengthening the supply chain’. Perhaps a little fat in the supply chain diet—especially for critical parts—may not be such a bad idea, after all.

A careful balancing act

Of course, adding a little buffer into the automotive supply chain comes with increased financial impact as well as potential risk of obsolescence, depending on the item in question. Hence, this course of action needs to be balanced against the potential benefits to be reaped in terms of resilience and maintaining those all-important customer commitments. Better demand forecast data, visibility deep into supply tiers, hedging and buffering are all tools that can be deployed. But, ultimately, it all boils down to this: automotive businesses need to constantly and consistently assess and adjust their supply chain strategies to respond to—and ideally anticipate—potential constraints, while simultaneously ensuring that they remain competitive on key performance indicators.

Another strategy is to shorten supply chains. As has become all too evident recently, automotive supply chains are precariously extended around the globe, making even the slightest hiccough ripple through like a destructive shock wave. According to Laurie Harbour, Chief Executive of supplier consultancy Harbour Results, “If you’re not going to buy where you build, then understand the risks that are associated with that.”

In pursuit of greater efficiency and reduced costs, has the equation changed to such an extent that the risk/reward ratio has become significantly out of balance?

A cultural shift

Industry culture also bears some responsibility for the fragility of automotive supply chains. Typically, OEMs have wielded enormous power to force suppliers to operate on the thinnest of margins, because they themselves have had to fight hard for every pound of profitability. They have also not permitted suppliers to pass any unexpected cost increases on to them, further tightening the vice-like grip on the suppliers. Of course, the pandemic has changed that, with vehicle inventories at all-time lows and prices at all-time highs. However, in normal (i.e., prepandemic) conditions, the major suppliers have also been guilty of similarly pressuring their own suppliers. What has resulted is a cascade of brutal cost pressure throughout the supply tiers.

The entire dynamic between OEMs and suppliers has been characterised by a lack of trust and transparency and, in many cases, an almost adversarial relationship. If any good can be said to have come out of the COVID pandemic, perhaps it’s that it has forced both OEMs and suppliers to realise their mutual interdependence, and to work towards greater collaboration and trust, leveraging innovative technologies to facilitate this. Furthermore, the OEMs and larger suppliers bear the additional responsibility of investing more in supplier development and moving beyond paying mere lip service to the notion of partnership.

Lessons from the past

While there is reason to hope that some of the lessons learned from the pandemic in terms of supply chain strategies and supplier relationships will become institutionalised in the automotive industry’s culture, an extra dose of vigilance is recommended to avoid falling back into old ways, which has been the pattern in the past. To quote Sunil Chopra, a professor of operations management and information systems at the Kellogg School of Management at Northwestern University, “We’ll see a surge now in companies talking about diversification. But as this fades into memory, decision-makers will not take disruptive events into account to the extent that they should. … In six months, they’ll discount the risk all over again.”

Adding a little buffer into the automotive supply chain comes with increased financial impact as well as potential risk of obsolescence

There’s a plot twist to that quote, however. It was said in 2011, after the Fukushima earthquake in Japan which severely disrupted many industries, especially automotive. At the time, Professor Chopra said that when it comes to most automakers and Tier 1 suppliers, not much changes after significant supply chain disruptions. Once they’re over, automakers and suppliers go back to business as usual until the next earthquake, tsunami, flood, strike or other event (such as a pandemic) causes a new disruption in the supply chain.

The automotive industry simply cannot allow history to repeat itself. Instead, it must focus on finding a middle ground between lean and the ‘old way’, mitigating against further disruption and challenges. While there is no silver bullet, concerted efforts to improve collaboration and strengthen supply chains will certainly help to future-proof automotive organisations, building and maintaining resilient yet agile supply chains able to withstand even the most unforeseen and challenging set of circumstances.

About the author: Anwen Robinson is Infor’s General Manager and Senior Vice President for UK & Ireland