Japan crisis a threat to companies' supply routes
Wednesday, March 16, 2011; 6:39 PM
-- The disaster in Japan has exposed a problem with how multinational companies do business: The system they use to keep supplies rolling in is lean and cost-effective - yet vulnerable to sudden shocks.
Factories, ports, roads, railways and airports in northern Japan have been shut down or damaged because of the stricken nuclear plant in the region. So auto and technology companies are cut off from suppliers in the disaster zone. Some have had to stop or slow production.
"When you're running incredibly lean and you're going global, you become very vulnerable to supply disruptions," says Stanley Fawcett, a professor of global supply chain management at Brigham Young University.
The risks are higher because so many companies keep inventories low to save money. They can't sustain production for long without new supplies.
Subaru of America has suspended overtime at its only North American plant, in Lafayette, Ind. Toyota Motor Corp. has canceled overtime and Saturday production at its 13 North American plants. The two companies are trying to conserve their existing supplies.
Among the auto plants damaged by the quake was one in Miyagi prefecture that supplies parts for hybrid batteries in Toyota Prius, Camry and Lexus hybrids. It's unclear when the plant, a joint venture of Toyota and Panasonic, will start running again.
Even companies whose Japanese suppliers escaped damage have scrambled to ensure supply lines remain intact. Ford, for example, relies on a Japanese plant for hybrid batteries for its Fusion, Escape and MKZ hybrid vehicles. That plant wasn't damaged in the quake. But Ford isn't taking any chances because of the transportation troubles in Japan. It's looking for alternate supplies and is looking into airlifting parts if shipping shuts down.
"The whole thing could change overnight," says spokesman Todd Nissen.
Automakers around the world have tried to copy the Japanese car manufacturing system, which is regarded as lean and cost-efficient. It's built around tight links between an automaker and its multiple suppliers. But if a kink develops in that system, known as the supply chain, an entire assembly line can shut down within hours.
Toyota says its vehicles contain 20,000 to 30,000 parts. Most come from about 600 suppliers. And the chain doesn't stop there. The 600 suppliers themselves rely on hundreds of other companies to provide raw materials and components.
Vehicles use lots of interchangeable parts - from hoses and tubes to nuts and bolts. But thousands of other parts are custom-designed for specific vehicles. Steering wheels, seats, and even rear view mirrors can differ from car to car.
"You can't build a car if just 98 percent of the parts are available," says Fred Hubacker, executive director of auto restructuring firm Conway MacKenzie in Detroit. "Many of these parts are highly technical products that are not easily replicated."