Tag: earthquake

OM in the News: Toyota’s Quake-Proof Supply Chain

Still impacted by the massive earthquake 6 months ago, Toyota has just announced that it is creating a robust supply chain that would recover within 2 weeks in the event of another disruption. Toyota and other Japanese automakers were forced to halt a large portion of their production both inside and outside Japan for months after the quake and tsunami cut off supplies of 100’s of parts from the devastated northeast region.The Baltimore Sun (Sept.6, 2011) reports that Toyota is taking 3 steps to fight supply chain risks, a process that will take 5 years to implement.

The 1st is to further standardize parts across Japanese automakers, so they could share common components that could be made in several locations.

The 2nd step is to ask suppliers down the chain to hold enough inventory–perhaps a few months’ worth–for components that can’t be built in more than one location. This is to prevent a repeat of what happened with microchip supplier Renesas, which has yet to complete recovery.

The 3rd step is to make each manufacturing region (such as North America or Europe) independent in parts procurement so a disaster in Japan does not impact production overseas.  This would also offset losses from the strong yen by lowering costs and creating a natural  hedge. Last year, Toyota built 43% of its 7.6 million vehicles in Japan and exported more than half of them. Currently, the company provides engines and transmissions  for cars built here and in Europe from Japan– at a cost that is high due to the strength of the yen. Toyota will also begin importing more components to cut cost of cars made in that country.

Discussion questions:

1. Is the plan overkill? If a part is made in a low-risk zone, does it need to be made in a half-dozen plants?

2.  Do these initiatives apply beyond the auto industry?

OM in the News: “Thin Strands” Supply Chains

Today’s  New York Times (March 20,2011) article opens: “Tony Prophet, a senior VP for operations at H-P, was awakened at 3:30am in California and told an earthquake and tsunami had struck Japan. Soon after, Mr. Prophet had set up a virtual ‘situation room’, so managers in Japan, Taiwan, and America could instantly share information. Mr. Prophet oversees all hardware purchasing for H-P’s $65 billion-a-year global supply chain, which feeds its huge manufacturing engine. The company’s factories churn out 2 PCs a second, 2 printers a second and one data-center computer every 15 seconds. ‘It’s like being in an emergency room, doing triage’ “, he says.

Today’s global supply chains indeed mirror complex biological systems like the human body. At times they can be quite vulnerable to a seemingly small weakness; it’s like a tiny tear in a crucial artery causing a heart attack. But the disaster in Japan (see our blogs on March 14 and 16) presents a first-of-a-kind challenge. Plants around the world, some not even knowing their 3rd tier suppliers were in Japan, are starting to close (eg., the GM truck plant in Louisiana).

The buying and shipping of supplies has been transformed in the past 20 years. Manufacturing is outsourced around the world, with each component made in locations chosen for expertise and low costs. That means supply lines are longer and more complex—called the thin strands phenomenon— or the difficulty and cost of seeing deeper into the supply chain. “Major companies have constant communications and deep knowledge of primary suppliers”, says Harvard Prof. David Joffe. “It’s the secondary layer of suppliers where the greater risk is”.

“Lacking some part (and the new Apple iPad2 has 5 from Japanese suppliers), even if it costs just dimes, can mean shutting a factory,”‘ says a former Apple exec. Will the Japan quake prompt companies to re-evaluate risk in their supply chains? Will there be a shift from JIT to a “just-in-case” mentality? This is a great article to share with your class.

Discussion questions:

1. How has the production of electronic components evolved in the past decades?

2. Why does Apple treat its supply chain as a trade secret?

3. What is the role of “smart technology” in solving the “thin strand” problem?

OM in the News: Global Supply Chains in Turmoil…or a Painful Blip?

With the words “global supply chain” continuing to dominate business headlines around the world, OM will remain in the news until Japan is able to stabilize its economy. And that may not be for some while. Today’s Wall Street Journal (March 16,2011) lead story writes: “International companies from BMW to Boeing girded for possible disruptions to supply chains.” In these early days of assessing the quake’s damage, it is tempting for a gloomy view to carry the news.

After all, Japan is a key supplier of advanced parts used in the final assembly of products throughout the world.  Malaysia’s Eita Electronics depends on parts from Japanese factories for its circuit breakers. BMW receives  electronic components for navigation systems and digital displays. And Boeing’s 787 wings and fuselages are produced there (see our Global Company Profile in Ch.2). It truly is amazing  how dependent one nation’s manufacturers have come to depend on anothers.

The Journal adds:” Supplier logistics are severely dislocated by restrictions on using highways for freight, as well as unpredictable power cuts”. Mazda, Honda, Nissan, and Toyota have all suspended operations even though most of their plants were not heavily damaged. Toyota is even slowing US production, just in case it cannot ship parts it makes in Japan. American auto makers cannot celebrate just yet, as they in turn receive specialized parts, such as batteries, from Japan.

Just to balance the picture, financial services giant UBS  issued this  report (March.14,2011): “We believe this catastrophe is unlikely to inflict a significant blow to Japan’s growth outlook for this year…First, the major business centers suffered only limited damage as most of the destruction was concentrated in the northeast coast, which accounts for about 7% of Japan’s industrial output. Second, outside of the worst affected areas, business activity moved towards normalization over the weekend”.

Discussion questions:

1. What are some products not impacted by the damage to Japan?

2. What important issues might the UBS report be overlooking?