4 Ways the Auto Industry Can Innovate Itself Out Of The Supply Chain Crisis

Over the past few decades, the auto industry has proven that its particular flavor of innovation mostly involves taking existing technologies and making them better. Refined engines, improved safety, hybrid-electric drivetrains... you get the idea.

But the automakers are also pretty good at innovating in management and production. This talent could come in handy now, as the current supply chain crisis, created by the Japan quake and tsunami and showing no clear signs of being resolved any time soon, has given the industry a chance prove its mettle.

There have been two outstanding examples of this in automotive history: legendary General Motors (GM) midcentury president Alfred P. Sloan's creation of the modern corporation; and Toyota's (TM) codification of the lean manufacturing principles now commonly known as the Toyota Production System (TPS). Is it time to get creative on this front again? You betcha:

1. Solve the inventory problem. This one is tricky. "Just in time" production tried to keep inventory to a minimum to reduce waste and costs. But when disaster strikes and takes out pieces of the supply chain, auto assembly plants and their suppliers rapidly run out of parts. A lean inventory yields higher profits. But a deeper inventory is insurance against a catastrophe.

   The auto industry needs to develop a Third Way. It's possible that carmakers could re-establish some elements of old school vertical integration, bringing part supply back in-house, but using technology to forecast how many parts they'll need based on true demand for vehicles and actual market conditions.

2. Simplify production. This one is a biggie. Automobiles are complex constructions. Maybe too complex. One or two critical electronic components that go AWOL can stall the completion of an entire vehicle. It will take time, but automakers can initiate reviews of their design and manufacturing processes to eliminate as much complexity as possible. This doesn't have to mean vehicles with fewer features. And ultimately it could lead to cars and trucks that are easier to build and maintain.

3. Move toward agile manufacturing. Here's a decent analysis of "agile" manufacturing, which the writer Paul T. Kidd contrasted with lean manufacturing in 2000:

   Agile Manufacturing enterprises are expected to be capable of rapidly responding to changes in customer demand. They should be able to take advantage of the windows of opportunities that, from time to time, appear in the market place.

   A perfect example of this would be the development of more fuel-efficient vehicles when gas prices are on the way up. Right now, carmakers have to hedge their bets on fuel-efficiency, assuming that within a particular product cycle, there may or may not be enough demand to justify fuel-sippers. If they're agile, however, they can respond to a gas spike by rapidly bringing high-MPG, small-car production online.

   This requires two things: first, a compression of the usual four-year vehicle development time frame; and second, the use of global platforms that can rapidly be deployed to the regions where they're needed. Ford (F) has already begun to execute on number two, creating a versatile, fuel-efficient "world car" platform that it can build and sell where demand is greatest.

4. Redefine demand. Too often, automakers fall into the trap of deciding that people want to buy cars, not transportation. This locks them into the kind of logistical nightmare scenarios they're currently enduring due to the supply chain crisis: the chain is designed to produce cars, not something else. If, however, you can shift your production to build something else when there are parts-supply problems -- or simply when demand for cars collapses, as it did in 2009 -- you can thrive as an adaptable manufacturing entity, rather than just as a carmaker.

   Think this is impossible for huge brands, like GM and Toyota? Then you don't remember World War II, when GM stopped making passenger cars and instead built planes and tanks.

The auto industry certainly hopes to see the supply chain crisis end by next year. But it shouldn't go back to business as usual. There's a golden opportunity to innovate here. And it will be the kind of management innovation that will pay dividends the next time something terrible happens.

• 5 Things Toyota Must Do To Recover From Its Crisis
• Chain, Chain, Chain: The Post-Quake Auto-Parts Crisis Grinds On
• 5 Ways China Can Benefit From Japan's Auto Supply Chain Crisis
• 5 Things the Auto Industry Can Learn From the Supply-Chain Crisis
• Relax, People, the Quake in Japan Isn't Going to Kill the Car Business
• Lean Production: Another Casualty of the Japanese Quake?