U.S. Automakers Throttle Past Japan Quake Supply Chain Woes, While Others Stall

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While Japan's March 11 earthquake did not damage the global supply chain as badly as initially feared, the world's automakers – particularly those based in Japan – have faced a tougher road to recovery.

Thanks to a smaller reliance on Japanese parts and a quick response to the crisis, U.S. automakers have weathered the disruption to their supply chains well, with minimal impact on production.

The Japanese automakers, however, with their strong reliance on the just-in-time inventory system and preference for single-source suppliers, have struggled to get back on their feet and stand to lose market share, at least in the short term.

"In the race to provide better quality at lower prices, manufacturers picked very narrow, optimized supply chains," said Willy C. Shih, Professor of Management Practice in the Technology and Operations Management unit at Harvard Business School. "They put all of their eggs with one supplier that had the best product at the lowest price."


Japan's Fractured Foundation

Japan's three largest automakers — Toyota Motor Corp. (NYSE ADR: TM), Nissan Motor Co. Ltd. (PINK ADR: NSANY) and Honda Motor Co. Ltd. (NYSE ADR: HMC) — had to deal with interruptions to their supply chain as well as damage to their domestic assembly plants.

Toyota's April production in Japan plummeted 78%, Honda's fell 81%, and Nissan's dropped 49%.

Toyota, which in 2008surpassed General Motors Company (NYSE: GM) as the biggest automaker in the world in total sales, essentially invented the just-in-time supply strategy that has become more of a liability.

Although all of Toyota's assembly plants were back online by mid-April, they could only operate at about half of capacity due to parts shortages.

The supply chain trouble soon spread throughout the Japanese automakers' global operations. In April, the company closed its plants in the United States and Canada on Mondays and Fridays and throttled production back 50% the remaining three days.

To make matters worse, possible shortages of electricity in Japan could hamper production at both the parts factories and the auto assembly plants.

Toyota said it hopes to get global production to 70% of normal levels this month, but does not expect to reach full production until at least November. Honda is hoping to get back to normal this summer; Nissan by October.

The disruption is hitting Toyota's bottom line hard. Profits plunged 77% for the first quarter of 2011, Toyota said. Since the earthquake occurred near the end of that quarter, the poor first-quarter performance doesn't bode well for the current quarter.

Likewise, Honda's profit declined 38% in the March quarter. Nissan's profit reversed a year-earlier loss; it suffered less damage to its operations than its rivals and figures to exploit that advantage.

The reliance on single-source domestic suppliers – partly a consequence of the deep loyalties treasured in Japanese corporate culture – has magnified the disaster's impact on Japan's auto industry. But with that system's drawbacks now exposed, Japanese executives may begin to reconsider the wisdom of such exclusive relationships.

"I fully understand that we can't go on with just a desire to protect manufacturing in Japan," Toyota's humbled Chief Executive Officer, Akio Toyoda, admitted last month.

Motor City Muscle

Meanwhile, U.S. automakers, because they use a far lower percentage of Japanese parts in their vehicles and are far more willing to use alternate suppliers if necessary, have sustained far less damage to their businesses than their Japanese counterparts.

In fact, Japan's role as a supplier is not nearly as large as it once was, mitigating the quake's impact on the global supply chain for many industries. China by far is the world's biggest supplier of parts and materials; Japan is eighth on the list – tied with Canada.

Nevertheless, the threat was significant – the lack of just a few components could have forced costly shutdowns of entire assembly lines for days or weeks. But the U.S. automakers responded swiftly to mitigate the impact of any hiccups in their supply chains.

Chrysler Group LLC, which traditionally shuts down its factories for one- or two-week periods over July and August, has moved up the breaks for three facilities to June to conserve parts. Chrysler hopes the maneuver will buy time for suppliers to recover, or for Chrysler to identify alternative suppliers as needed.

Another U.S. automaker that attacked the problem aggressively was GM. Although only 2% of GM's parts come from Japan, many models cannot be built without them.
Within four days of the Japan quake GM had created a crisis task force of hundreds of employees to assess the impact on its supply chain. The team identified 118 parts that could run out. Then, the focus turned to finding alternative suppliers while helping its main suppliers get back online as soon as possible.
GM even sent 40 employees to Japan to observe first-hand the issues facing the suppliers.

"Our objective was to help the suppliers get back into production, not to re-source the parts somewhere else," Ronald Mills, GM's executive director of engineering and program management, told The New York Times. "We like the parts we had."

By mid-May, GM had reduced the number of parts on the watch list from 118 to five. Despite some lingering issues, Chief Executive Officer Daniel F. Akerson said supply problems from the quake would have no material impact on GM's earnings.

Surprisingly, the quake has had minimal impact on industries other than auto manufacturing, but the other industries would do well to learn from the experience.

If nothing else, the quake may serve as a wake-up call to all companies to re-think their supply chain strategies and have contingency plans ready to go for the next disaster.

"There are a lot of moving parts in this, and it will be interesting to see how it works out," said Harvard Business School's Shih. "Companies need to understand the depth of their supply chains and critical dependencies. Then they can think through how 'narrow' is the optimum solution, and the cost/benefit tradeoffs of steps like incorporating more supplier or geographic diversity."

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  1. Ian Fletcher | June 7, 2011

    Enjoy the windfall so long it lasts, pretty soon Japan Inc. will return vigorously.

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