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Chain, Chain, Chain: The Post-Quake Auto-Parts Crisis Grinds On

I caught a decent amount of flak for my recent post about how Japanese innovative approach to "lean" manufacturing is suffering in the aftermath of the tragic earthquake and subsequent tsunami. However, the news of the past two weeks has demonstrated that the entire auto industry in Japan is heavily reliant on "just in time" parts deliveries to its assembly plants. And the problem isn't limited to Japan.

General Motors (GM) has had to curtail production of some vehicles in the U.S. due to a lack of made-in-Japan parts. So has France's Renault. The problem is less severe for Japanese carmakers operating as "transplants" in the U.S. But the crisis, which has idled Japanese production and prevented hundreds of thousands of cars from getting built, may compel automakers to expand inventory and, more importantly, seek to diversify their supply chains.

How do you hedge risk when production is lean?
Almost all of the time, barring a labor strike or a shortage of raw materials, lean production is effective. It reduces the need to hold inventory, which in turn ramps up profits. However, it is perpetually at risk of some catastrophic event. Hedging that risk is difficult, because the supply chain, particularly in Japan, tends to be geographically close to the final assembly point.

In the future, however, as automakers venture far afield of their home markets and start to build more cars in developing countries, the supply chain may be replicated in such a way that car companies will have options if the normal supply chain is disrupted. Obviously, logistics would play a major role here: a natural disaster could stall production for a few weeks, but a carmaker could get it back up and running once a parts supply from a distant region is diverted.

A complex management challenge
You can see where this is headed, however. Robbing Peter to pay Paul won't fly if it means that auto manufacturing in a marginally profitable region, if affected by a major disruption, could lose out to a region where profits are higher and depend on the same steady supply in parts.

This raises another issue -- namely, does lean manufacturing continue to make sense in developed markets? Not really, if it means that growth markets may someday be forced to duke it out with their big brothers over who gets the transmissions and suspension components. Then again, labor costs are already so high in developed economies that lean is probably necessary to maintain margins. In developing markets, waste -- in the form of stockpiled parts sitting around and not doing anything -- could be more acceptable.

Advocates of lean want lean no matter what
The Japanese supply chain crisis in the auto industry should indicate that lean manufacturing isn't completely invulnerable. But the manufacturing world has been fixated on the concept for so long now that it can't process why it wouldn't be universally applicable, no matter what the circumstances or risks.

One option might be to bring so-called "systems" thinking into the picture. This approach could integrate lean with various other manufacturing philosophies and, through technology, provide supply chain managers and logistics experts with a few more arrows in the quiver when a mega-disruptive disaster comes along. One of the bloggers who linked to my post mentioned a conference on SMART manufacturing, which plans to explores the systems idea. Here's another analysis, which casts post-lean manufacturing as something more "light" and sustainable, with enough intelligence built in to know when actually getting down to building something might not make sense, environmentally or financially.

The quake has imposed a terrible costs on Japan. But there are ways that its automakers can learn from what happened and move into the next level of manufacturing management.


Photo: GM Media