5 Things the Auto Industry Can Learn From the Supply-Chain Crisis

Just-in-time manufacturing has served the global auto industry very well, driving down costs and increasing profits. But as the Japanese earthquake and tsunami have shown, the Achille's Heel of the system is a massive disruptive event. Carmakers and their suppliers could avoid confronting this (they have in the past), on the grounds that the risk is pretty marginal. Or they could look to learn from the supply chain crisis that is currently messing with their business big time.

Here are five lessons for automakers in the latest crisis:

1. Move from lean manufacturing to flexible manufacturing. The auto industry, led by the legendary Toyota Production System (TPS), has been captivated by lean for decades. However, when the supply chain gets clobbered, as it has in the past month, the vulnerabilities of lean become apparent. Flexible or "agile" manufacturing basically makes lean smarter by making it more nimble, less dependent on "chains" or more focused expanding or contracting production rapidly and profitably.
2. Preposition "crisis" inventory. This goes against the whole lean concept, in that it creates a stockpile of inventory that's wasting space and consuming capital. However, in this area the auto industry can learn from the military, which maintains "prepositioned" supplies near possible combat zones around the world to avoid the logistical hurdle of moving everything to the battle all at once. Small inventories of critical parts could be kept in strategic reserve, as a hedge against catastrophic supply chain breakdowns.
3. Pursue standardization of supply. At a fundamental level, all cars are basically the same. They have an engine, wheels, brakes, etc. But parts can vary widely. Carmakers have discovered that different models can share similar platforms, cutting down on costs. However, higher levels of standardization are possible, which would enable Japanese carmakers operating in the U.S. and dependent on the Japanese supply chain to "borrow" components from the Big Three. Obviously, this would be a stretch for most automakers, as they want to maintain quality differentiation from their competitors. But it's not inconceivable, at a limited level.
4. Enable local fabrication. Even lean manufacturing operates on a convergence model, with all the necessary vehicle components arriving "just in time" at a central assembly plant where they are put together as a car. Tata Motors, with its Nano "Peoples' Car," is exploring another model: making it possible for small, local manufacturers to assemble completed vehicles. Think of this as a distributed model of manufacturing, with dozens of small assembly facilities scattered throughout a country or region. Vehicles are produced on demand, with a certain amount of licensed parts fabrication happening on or near the assembly site. Like the Internet, multiple nodes can be knocked out, but the production system remains viable. The drawback is that this approach would create a certain amount of quality variation. It also works better with cheap, simple vehicles.
5. Make the industry more sustainable. Just-in-time manufacturing has done a great deal to force waste out of the system. But it hasn't done much to address the global problem of overcapacity. Simply put, the auto industry is set up to build too many cars. This excess capacity can be supplied just-in-time, but it produces vehicles that don't sell. Also, portions of this capacity have to be idled when demand isn't present. A more sustainable auto industry would strive to eliminate excess capacity and try to make higher profits off the capacity that remains.

Related:

• Chain, Chain, Chain: The Post-Quake Auto-Parts Crisis Grinds On
• Lean Production: Another Casualty of the Japanese Quake?
• BMW Says Flexible, Not Lean, Is The Next Big Thing in Autos