global supply chains – Page 4 – The OM Blog by Heizer, Render, & Munson

OM in the News: Seeking Semiconductor Self-Sufficiency

The U.S. is looking to jump-start development of new chip factories here as concern grows about reliance on Asia as a source of critical technology, reports The Wall Street Journal (May 11, 2020). A new crop of cutting-edge chip factories in the U.S. would reshape the industry and mark a U-turn after decades of expansion into Asia by many American companies.

The pandemic has underscored longstanding concern by the U.S. about protecting global supply chains from disruption, especially from Taiwan Semiconductor Manufacturing (TMSC), the world’s largest contract chip manufacturer. TSMC is one of only 3 companies capable of making the fastest, most-cutting-edge chips. U.S. officials are in talks with Intel, the largest American chip maker, and with TSMC, to build factories in the U.S. TSMC said it is open to building an overseas plant.

Strengthening U.S. domestic production and ensuring technological leadership is “more important than ever, given the uncertainty created by the current geopolitical environment,” says Intel’s CEO. Chip-factory development plans have gotten under way as concern mounts about the fragility of the Asian supply chain and the defense industry’s access to domestically sourced advanced chips.

The U.S. already has dozens of semiconductor factories, but only Intel’s are capable of making the fastest and most-power-efficient chips (those with transistors 10 nanometers or smaller). Intel, however, mostly makes silicon for its own products. Among foundries that make chips on contract for other companies, only TSMC in Taiwan and Samsung in South Korea make chips at 10 nanometers or lower.

U.S. chip makers have backed off on building cutting-edge chip factories domestically largely because of their cost, which can surpass $10 billion, and a rapid development cycle that means the benefits of being ahead don’t last long. But other governments, including China, Taiwan, Singapore and Israel, have poured generous financial support into developing their own domestic manufacturing.

Classroom discussion questions:

1, How does this idea mesh with the theory of comparative advantage (see Ch. 2 in your Heizer/Render/Munson text)?

2. Where do Intel and TSMC fall on the international operations strategies graphic seen in Figure 2.9 on page 48?

OM in the News: The Crash of the $8.5 Billion Global Flower Trade

As people everywhere cancel events and flower orders, the ripples reach into Dutch auction halls and Kenyan rose fields. A delayed wedding is hardly a disaster during a pandemic that’s killing 1000’s of people daily. But in greenhouses from Ecuador and Colombia to Kenya, growers were already stacking roses in compost heaps. Within days of the lockdown orders in the U.S. and Europe, demand for stems evaporated.

The crash of the $8.5 billion global flower trade shows how quickly and distinctively the coronavirus is disrupting supply chains, reports Businessweek (April 20, 2020). The flower trade is a miracle of modern capitalism. A chain of cold storage starts with stems being picked in far-flung places, then packed into refrigerated trucks, driven to refrigerated planes, and flown to Amsterdam to be auctioned off. They’re then repacked into more cold trucks and planes and delivered to supermarkets, florists, and bridal bouquets across Asia, Europe, and the U.S. within a day.

The auctions are run by a cooperative, Royal FloraHolland, whose site handles the bulk of the global trade out of a Dutch concrete warehouse which is larger than 75 soccer fields– one of the biggest buildings in Europe. The blooms are sold under the traditional Dutch auction system, in which prices start high then tick lower as a clock counts down. The first buyer to pounce wins. The average day sees more than 100,000 transactions.

Before the pandemic, 42 cargo flights arrived each week from Kenya, whose climate allows roses to grow year-round. That nation ships about $1 billion worth of flowers a year, making it Europe’s biggest supplier. More than 150,000 people toil on Kenyan flower farms. The work is grueling, with long shifts in steamy greenhouses, and laborers earn as little as $70 a month.

Classroom discussion questions:

In Ch. 2 of your Heizer/Render/Munson OM text, we see that companies achieve competitive advantage in one of 3 ways. Which best describes the flower industry?
How does this supply chain (discussed in Ch. 11 on p. 446) differ from a typical manufacturing one?

OM in the News: The History of Supply Chains

In 1970, there was no FedEx, no internet, no PCs, no cellphones, no Amazon, no TSA, no 3D printers, no Google, and no Uber, writes IndustryWeek (April 17, 2020). Nixon hadn’t gone to China yet, so offshoring wasn’t a major issue. There were no supply chain planning systems, no warehouse management systems, no UPC barcodes, no online marketplaces. It was a much slower-paced economy than the frenetic pace the supply chain moves at now.

In 1970 we didn’t even have anything called the “supply chain.” Although the basic concept of SCM dates back to the 1950s, the actual term “supply chain” wasn’t coined until 1982. How different running a manufacturing operation was in 1970. The EPA wasn’t introduced until late that year, OSHA didn’t launch until 1971, and the trucking and rail industries weren’t deregulated until 1980.

When we wrote the first edition of our textbook, Production and Operations Management, in 1988, we didn’t mention the following: (as they either hadn’t been invented yet or nobody had associated them with SCM): drones, the Internet of Things, same-day delivery, omni-channel distribution, machine learning, Uber-style freight transportation apps, blockchain, cobots, RFID, and virtual reality,

We also didn’t mention the impact the coronavirus would have on supply chains, or any of the other major disruptions we’ve seen in recent years, such as the swine flu of 2009, the Icelandic volcanic eruption of 2010, the Japanese earthquake and tsunami of 2011, or the three deadly hurricanes of 2017. But we’ve learned that supply chains—and the people managing them—are incredibly resilient. In 25 years people will likely look back at how slow-paced supply chains moved in 2020. Will the convergence of GPS, RFID, wearable and supply chain visibility technologies lead to the point that everybody will carry some sort of ID chip that will make obsolete the idea of cash and credit cards?

Classroom discussion questions:

What technologies have the potential to seriously impact current supply chains?
Will the global move toward sustainability be impacted by the virus pandemic?

OM in the News: Why the Richest Nation Can’t Get You a Face Mask

The U.S. is scrambling for surgical masks

Over the course of the past 50 years, the U.S has organized its economy following the theory of comparative advantage (see Ch. 2 in your Heizer/Render/Munson OM text). That means outsourcing to whatever external organization can provide the good or service at the best price. For much of this half century, the most cost-efficient strategy has been outsourcing to Asia. But outsourcing the wrong activities can be a disaster, as we now see in the coronavirus epidemic.

Critical supplies like medical equipment, pharmaceuticals, and food have been outsourced to China. “Most Americans know their iPhone comes from China but they do not know that more than 80% of all of their antibiotics, vitamin C and tilapia, 50% of their cod and apple juice, and 34% of their mushrooms come from China as well,” says one OM professor .

So I guess we shouldn’t be surprised by The Wall Street Journal headline (April 2, 2020): “Why the Richest Country on Earth Can’t Get You a Face Mask.” Indeed, Americans are asking why the most technologically advanced nation in the world can’t provide its citizens and health-care workers with lifesaving medical equipment.

Years of underinvestment in pandemic planning is a big part of the answer. But as in the pharmaceutical sector—highly dependent on Chinese and Indian producers—a reliance on global supply chains is also making life difficult for Western hospitals struggling to source gear. 85% of global medical mask-production capacity is in China. It is also a major producer of the polypropylene fibers that filter out dust and pathogens in the N95 respirators medical professionals rely on. The U.S. said in early March that it has only about 1% of the medical masks it would need to combat a year-long epidemic.

When the pandemic ends, one of the enduring changes it causes could be a major reassessment of complex global supply chains for critical medical goods.

Classroom discussion questions:

What are the advantages of outsourcing?
Why can’t the U.S. produce the billion masks it needs this year?

OM in the News: Ships Are Skipping China

February 2020 will come to be remembered as a period of historic disruption to physical supply chains the world over, as the coronavirus wrecks trade. Dozens of export sailings to ship China-made goods to consumers from the U.S. to Europe — think handbags, flat-screen TVs, and plastic toys — have been canned since the virus crisis escalated last month. Those non-shipments are part of a much bigger picture in which every aspect of global shipping — from oil and gas through to dry-bulk commodities — has been upended.

“The unprecedented gyrations caused by the virus matter because 90% of all trade moves by sea and China has grown into the maritime industry’s main source of cargoes,” writes Material Handling & Logistics (Feb. 18, 2020). The disruptions have left toymakers like Hasbro and fashion houses like Versace and Jimmy Choo struggling with their supply chains. Vessels are idling. And exporters to China face diversions as clients there use clauses in their contracts to walk away from commitments to buy cargoes. “All the signs are that there has been a major dislocation in global supply chains,” says a trade economist.

All this has come about because the virus has led to hundreds of millions of people being told to stay away from work or education in China, squeezing output in the world’s fastest-growing major economy.
The number of blank sailings — where ships don’t load at a planned location — has jumped since the outbreak began. Almost 600,000 20-foot boxes are currently out of action as a result of the virus.

Hasbro says that the virus is disrupting its commercial operations in China — from where it had already been seeking to diversify its supply chain. Hyundai halted some of its car production because of component shortages caused by the virus. Fiat Chrysler is planning to halt operations at its assembly plant in Serbia due to a lack of parts from China.

Classroom discussion questions:

How does a logistics manager deal with this situation?
Can airfreight help replace shipping?

OM in the News: World Economy Shudders as Coronavirus Threatens Global Supply Chains

Travellers are few at this Chinese railway station.

The last time a virus outbreak hit China, in 2003, the global economy emerged unscathed. Now, nearly 2 decades later, the effects of the coronavirus threaten to ripple around a world transformed by China’s boom. Chinese consumption and production power growth from Asia to North America, Europe and beyond. Manufacturers world-wide are tethered to China by the tentacles of a supply chain that relies on the country’s factories for many intermediate and finished goods. “This is a once-in-a-generation event,” said one CEO.

With fears of contagion keeping Chinese workers home, production is getting pinched, writes The Wall Street Journal (Feb. 23, 2020). In the U.S., GM warned that a lack of China-made parts could slow assembly lines at plants in Michigan and Texas. Hyundai suspended one of its main assembly lines in Ulsan, S. Korea, because it couldn’t get parts from China. Asiana, S. Korea’s 2nd-largest airline, put its 10,500 employees on staggered shifts of 10 days’ unpaid leave. Videogame giant Nintendo said that shipments of its flagship Switch gaming console are delayed as it can’t get parts from Chinese factories. Apple won’t meet revenue projections for the first quarter as the epidemic shuts its China plants. Container-ship operators are preparing profit warnings as dozens of trips out of China are canceled. In Vietnam, an economy highly dependent on Chinese supply chains, exports in January fell 17%.

Major electronics producers that depend on Chinese parts also have suspended output because of the outbreak. Others are weighing relocation. Japan’s exports to China are expected to drop 7% this quarter from the prior one. An extended Chinese shutdown could cripple global manufacturing and cost the world up to $1 trillion in lost output. “The current situation is more serious than we thought,” said S. Korea’s president.

Classroom discussion questions:

How can companies evaluate disaster risk in their supply chains? (See Supp. 11 in your Heizer/Render/Munson OM text)
What impact will this virus have on supply chains in 90 days if it is not contained?

OM in the News: Coronavirus Tests Apple’s China Dependency

Coronavirus has given new meaning to something Apple executives have been saying for years: Apple needs another China. The rapid spread of the virus and the disruption it has caused is the latest test of Apple’s dependency on China as its manufacturing base for most of the iPhones, iPads and Macs sold world-wide.

To curtail the virus’s spread, local governments have asked people to stay away from work. Shipments of parts and components to the Apple assembly plants are curtailed, and workers who went home to celebrate the Lunar New Year may not return, out of caution. Foxconn, Apple’s main manufacturer, is contending with a strict quarantine in Zhengzhou city, home to its largest iPhone plant.

Apple has successfully weathered a number of challenges involving China in recent years, writes The Wall Street Journal (Feb. 8, 2020). But it is among the foreign companies most vulnerable to the outbreak because it hasn’t diversified its manufacturing. Though it looked at assembling iPhones outside China, it found the costs of facilities and training too high and opted to keep exporting from China. Apple’s leaders have long considered its reliance on China-based manufacturers as both a strength and a vulnerability. Apple worried more about a disruption in exports from the country than loss of sales inside Greater China, a market that accounts for 1/5 of revenue.

Samsung, the world’s largest smartphone maker, wound down production in China last year as part of a years-old strategy of diversifying its manufacturing base by shifting production to India, Vietnam and elsewhere.

Apple is known for its operational prowess and has a record of navigating supply-chain challenges. After an earthquake triggered the Fukushima nuclear crisis in Japan in 2011, Apple quickly created a new factory to maintain production of optical drives it needed for its devices. When monsoons flooded factories in Thailand later that year, Apple turned to the Thai Navy to load boats with the heavy equipment necessary for production. But those events only affected a sliver of Apple’s supply chain. Coronavirus affects the very heart of it.

Classroom discussion questions:

Referring to Supplement 11 in your Heizer/Render/Munson text, draw a decision tree for Apple’s disaster risk.
What can Apple do at this point if it thinks the virus will have a 6-month impact on supply chains?

OM in the News: The Virus and Global Auto Supply Chains

The coronavirus outbreak, which has all but sealed off China’s Hubei province from the rest of the world, could have an outsize impact on the global auto industry, which has a large footprint in the region in central China. reports The Wall Street Journal (Feb. 2, 2020). The virus’s spread has disrupted car manufacturing in China and prompted major auto companies with operations there to restrict travel and ask employees to stay home. One German auto supplier said that at least 5 employees had been infected.

The Chinese auto industry has grown from virtually nothing 30 years ago to become the world’s largest market for new vehicles. Wuhan, Hubei’s capital, has in that period emerged as an auto-making hub, home to state-owned Chinese Dongfeng Motor and numerous assembly plants for Honda., Peugot, and GM. Auto makers in Wuhan were expected to produce 1.6 million vehicles this year, contributing 6% of overall Chinese output.

Honda said it wasn’t sure when its 3 vehicle plants in Wuhan would reopen in light of the epidemic. These factories can build 600,000 vehicles/year–half of Honda’s total capacity in China. Webasto, a German auto-parts supplier, stated that four employees in Germany had contracted the virus after an employee from China visited headquarters. Bosch, the world’s biggest auto components supplier, warned that coronavirus could impact its global supply chain, which is heavily dependent on China. (Bosch relies on China for exporting electric motors, transmission and power electronics for electric cars).

The virus’ impact is not only on production and distribution of vehicles in China, but has major implications on global supply chains in other manufacturing arenas. Foxconn said it would keep its Chinese factories closed until mid-February. The move could affect global supply chains for tech companies that rely on Foxconn to manufacture everything from Apple’s iPhones to flat-screen TVs and laptops.

Classroom discussion questions:

Might this disease have a lasting impact on global supply chains?
What other industries are being affected in the US?

OM in the News: Boeing 737 Max Production Freeze Risks ‘Supply Chain Fallout’

With 13,500 workers, Spirit is the largest employer in Kansas’ biggest city. It gets half of its revenue from making fuselages for the 737.

Boeing just announced it would suspend production of its 737 MAX jetliner. This is an escalation of the crisis facing the giant plane maker that will ripple through the global aerospace industry. Boeing plans to halt production in January at its Seattle plant. The MAX was grounded globally in March following two fatal crashes of the aircraft within five months. Boeing employs around 12,000 workers at that 737 assembly plant. But production of the 737 MAX also supports thousands of jobs across a network of over 600 suppliers and hundreds of other smaller firms in the global MAX supply chain, reports Supply Management (Dec. 17, 2019).

Boeing had 4,545 MAX orders in backlog as of November and had been building the aircraft at a rate of 42 a month since April (down from 52/month). Many suppliers had said they favored Boeing maintaining some production, citing the risk of losing workers in a tight labor market during a halt. They said furloughing staff and stopping machinery would be harder than lowering production, and that restarting assembly lines would be costly.

One industry expert stated: “The decision to suspend production of the 737 Max is a largely unprecedented move and with the highest volume production of any large aircraft, the fallout across the global supply chain is going to be significant. The main problems for suppliers will be under-utilization of labor and machinery. Many suppliers have significant capital investment tied up in production capacity for the 737 Max program and they won’t be able to afford to keep this sitting idle for long.”

Classroom discussion questions:

Do a SWOT analysis on this decision.
Identify the top 5 suppliers that will be impacted.

OM in the News: A New European Supply Chain–Electric Batteries

The battle between Europe and China over control of the technology that powers electric cars has just begun, reports The Wall Street Journal (Sept. 15, 2019).

“The Chinese can build an entire factory in 10 weeks,” said the CEO of Sweden’s Northvolt AB, which aims to become the prime purveyor of batteries to Europe’s makers of electric and hybrid cars. Northvolt is launching into a market that has been locked up for years by South Korea giants LG, Samsung. and SK Innovation. His hope is that Europe can retain its expertise as car production shifts from mechanical engineering—where the region has excelled—to batteries.

VW alone expects to build at least 2 million electric cars a year by 2025. (VW just agreed to invest $994 million Northvolt.) Non-European players, such as China’s CATL are muscling in. CATL plans to construct a $2 billion battery plant in Germany. LG Chem is building a second plant in Poland, while SK Innovation is building its second Hungarian plant.

But European auto makers and politicians are eager to develop a regional supply chain mirroring the one that exists for conventional automobiles. This is something of a U-turn for car companies that long considered batteries a commodity not worth producing in Europe. Daimler ended battery cell production in 2015, saying it was too costly. But when these manufacturers recently began ramping up their EV plans, they struggled to secure sufficient raw materials and battery capacity, and realized they had to invest in battery production. Still, the cost of investing in battery development and production from the ground up is proving too steep for even large suppliers, such as Bosch.

The shift to EVs could have a huge impact on an industry that employs 13.8 million workers in Europe. Germany estimates it could destroy 13% of the country’s automotive jobs.

Classroom discussion questions:
1. How will EVs impact current auto supply chains?

2. Are U.S. auto makers facing the same challenge?

OM in the News: Disrupting the German Auto Supply Chain

Concern is rising in Europe’s automobile heartland about the economic impact of the industry’s move to electric vehicles from gasoline-powered cars, writes The Wall Street Journal (Aug. 16, 2019). Germany fears the country’s big car companies and rich ecosystem of suppliers is insufficiently prepared for the transition, and that their leadership may not be assured in an electric-car world. Assembling electric cars isn’t as complex or labor intensive as making traditional vehicles and relies partly on imported technology. And China has made rapid forays in electrification and is shaping up as a potentially formidable competitor in the field.

The trepidation is particularly acute in the city of Stuttgart, hub to one of the country’s biggest automotive clusters. The German auto industry employs 870,000 people nationwide, almost half in Stuttgart. They work at companies including Robert Bosch, piston-maker Mahle, and hundreds of smaller businesses that form the region’s auto supply chain. Trade union leaders fear that too few auto suppliers are taking steps to prepare for the huge changes that will come as the industry’s focus shifts even more toward electric vehicles.

And it isn’t just Germany. There are 309 automotive production and assembly plants across Europe, of which 72 are engine plants. The sector supports 13.8 million jobs in Europe, or 6% of total EU workforce and 11% of all manufacturing jobs.

The prediction is that fuel-powered cars will make up just 56% of new cars sold by 2030, down from 95% now. The biggest shift will be in Europe, where regulators are pushing tough restrictions on greenhouse-gas emissions.

Classroom discussion questions:

Is this an issue that will impact the U.S. auto industry heavily also?
What approaches should suppliers be taking?

OM in the News: Protecting the Global Supply Chain

Through government investments and subsidies, as well as intellectual property theft of companies like Idaho’s Micron, China has tried to dominate the $1.5 trillion electronics industry, reports Material Handling & Logistics (July 31, 2019). This, according to the U.S., creates serious, far-reaching threats to the supply chains that support the U.S. government and military. The MICROCHIPS Act, introduced July 30 in the U.S. Senate, creates a “coordinated approach to identify and prevent these efforts and others aimed at undermining or interrupting the timely and secure provision of dual-use technologies vital to national security.”

Chinese companies, according to Senator Mark Warner, which export telecommunication technology equipment into software, hardware, and services used in the U.S., hope to export 5th-generation technology (5G) to the U.S. that could potentially harm and expose both consumer and U.S. military information. “While there is broad recognition of the threats to our supply chain posed by China, we still lack a coordinated strategy to defend ourselves,” said Warner. “As a result, U.S. companies lose billions of dollars to intellectual property theft every year, and counterfeit and compromised electronics in U.S. military, government and critical civilian platforms give China potential backdoors to compromise these systems. We need a national strategy to unify efforts across the government to protect our supply chain and our national security.”

The MICROCHIPS Act addresses China’s practice of four major areas of electronic warfare, including supply chain exploitation through supplying faulty software hardware and components; cyber-physical attacks on U.S. systems; cyber-attacks on computer systems; and bad actors gaining sensitive information.

Classroom discussion questions:

What is the purpose of the MICROCHIPS Act?
What supply chains is the Senate most concerned with?

Guest Post: How Students Link Sustainability and Global Strife

Brent Snider is Teaching Professor, Operations and Supply Chain Management at the Haskayne School of Business, University of Calgary.

Rosanna Cole is a Lecturer in Sustainable Supply Chain Management, University of Surrey.

The global business environment has become increasingly turbulent, with international alliances and trading blocs fragmenting, extreme political candidates gaining popularity, climate change intensifying, all as the growth of developing economies declines and civil instability grows in many regions.

We recently surveyed more than 200 undergrad and graduate (exec MBAs) business students in Alberta about their views on business, sustainability and this turbulence. We found that students have now gone beyond connecting how business actions impact a corporation’s sustainability performance to how those very same actions increase or decrease environmental and societal turbulence.

With turbulence from uncertainty intensifying, business education is feeling societal pressure to better inspire responsible management. Students viewed the globalization of supply chains as directly contributing to the current global turbulence. And, conversely, they believed that sustainable supply chains could help reduce that turbulence by bringing about positive change on both environmental and social fronts.

Both groups of students made a connection between specific actions of global supply chains and how those actions can increase or decrease global environmental and societal turbulence. As one executive MBA student in our survey summarized it: “Business has more capacity to affect change than all the NGOs put together.” Both undergrad and grad students also strongly believed that sustainability considerations should be embedded in business education.

Sustainability content in business education was found to significantly increase global awareness and empathy for both groups, despite different life and work experiences. So it’s equally valued by both MBA students and undergraduates.

Furthermore, with robotics and artificial intelligence predicted to increase societal turbulence by bringing about significant labor market changes, corporations and B schools would be wise to expand and embed sustainability — or face the risk of even more public outcry in the very near future.

Here is the link to the study: https://theconversation.com/how-current-and-future-business-executives-link-sustainability-and-global-strife-114569

Good OM Reading: Top 10 Supply Chain Risks for 2019

Today’s economy relies on the smooth operation of sophisticated supply chains. Yet supply chains are vulnerable. Transportation delays, theft, natural disasters, weather, cyber-attacks and unexpected quality issues can disrupt cargo flows, creating short-term costs and delivery challenges. And shifts in local, national and international trade and policies can upset established supply chains. Here are the top 10 threats to global supply chains in 2019 predicted in a new report by DHL:

1. TRADE WARS Global trade tensions have led to new tariffs on a wide range of consumer products and industrial components.

2. RISING DEMAND AND FRAGILE SUPPLY CREATE RAW MATERIAL SHORTAGES While companies are increasingly pursuing regional manufacturing strategies for finished products, the production of many key raw materials remains highly globalized.

3. RECALLS AND SAFETY SCARES PUT QUALITY UNDER SCRUTINY In highly regulated sectors such as pharmaceuticals, airplanes, and medical devices, compliance and quality control is likely to rise, driven by wider public awareness and stricter enforcement.

4. CLIMATE CHANGE IMPACT The changing climate is likely to have wide-ranging effects on global supply chains.

5. TOUGHER ENVIRONMENTAL REGULATIONS In moves to tackle climate change, local air quality, and other forms of pollution, authorities around the world are introducing new regulations.

6. ECONOMIC UNCERTAINTY AND STRUCTURAL CHANGE The global trade war, uncertainty over Brexit, and stricter environmental regulations could become driving factors in putting financial pressure on lower tier industrial suppliers.

7. CARGO CAUGHT UP IN INDUSTRIAL UNREST Industrial action is a perennial risk in transport operations.

8. HAZARDOUS TRANSPORT A number of container ship fires and accidents early in 2019 highlighted what may become more commonplace occurrences.

9. BATTLES AT THE BORDERS INCREASE WAIT TIMES The migration influx to Western Europe and ongoing migrant caravans traveling to the U.S. has increased many countries’ focus on physical border security.

10. DRONES STRIKE A BLOW TO AVIATION SAFETY Airport disruptions related to air traffic safety present a greater risk of disruption to aviation logistics operations.

The full report (March 2019) is available free when you click the link above, but you must provide your name, email, etc., to access it.

OM in the News: The Stressed Global Auto Supply Chain

The automotive supply chain is a complex, global network of interdependent businesses ranging from small, family-owned manufacturers based in the U.S. heartland to large publicly traded overseas auto parts companies—all working in unison to keep cars rolling off the assembly line. But fights are emerging across the auto industry over who should bear the costs of tariffs, leading to new stress along the supply chain, reports The Wall Street Journal (Nov. 10, 2018).

Recently, Pierburg US, a manufacturer of parts used in the Ford F-150 pickup truck and Jeep Wrangler SUV, sued one of its suppliers over new tariffs imposed. The two sides have been in business for 20+ years. Pierburg says that the supplier’s refusal to ship electric motors from China to Pierburg’s factory in South Carolina unless it paid the 25% tariff cost in full was “extortion.” A failure to deliver the parts could shut down multiple auto factories and “plunge the automotive industry into complete chaos,” Pierburg added. Sorting out the cost of tariffs is difficult because some parts cross the U.S. border multiple times before being installed in a car, blurring the lines of what is “domestic” content.

A typical vehicle is made up of roughly 30,000 individual parts, and car companies on average work with hundreds of suppliers at once for each model line, either buying components directly or contracting them out further down the chain. Thousands of individual contracts outline in detail parts orders, delivery dates and prices, and many of them are locked in place months and even years in advance.

Toyota has told suppliers they shouldn’t count on the Japanese car maker to help absorb the higher tariff-related costs. The average operating profit margin in the auto parts manufacturing business is already slim–about 7%—so extra costs can hit earnings hard.

Classroom discussion questions:

Describe the auto supply chain.
What is the impact of tariffs proposed?