As if earthquakes, tsunamis and floods aren’t enough, now car companies need to deal with a worldwide shortage of PA-12, a special nylon used by almost all auto companies. According to Businessweek, PA-12 (polyamide resin) is a form of nylon that is used for plastic pipes, tubes and hoses to carry vapors, fuels and other liquids. It also used in plastics used in car seats. An explosion at the end of March at a chemical plant in Germany knocked one of the few companies that manufacture this resin out of production. Not only does this company (Evonik) manufacture this chemical, it also manufactures almost 70% of CDT (cyclododecatriene) which is used by other companies to make PA-12. Ouch. What makes this worse is that car companies following the tenants of just-in-time have very little inventory, especially of component parts. Just-in-time practices consider inventory to be one of the wastes that should be relentlessly targeted and eliminated. This has resulted in billions of dollars of savings due to reduced inventory levels and more streamlined operations. However, that inventory reduction means that there is no buffer to carry companies when a significant supply disruption occurs. The explosion at the plant in Germany, the earthquake and resulting tsunami in Japan, and the floods in Thailand are causing automakers to rethink their approach to just-in-time. The world has changed since just-in-time was developed by Toyota in the 1970s. Factors like increasing globalization, reliance on specialized parts (where one factory makes a large percentage of the world’s supply) have increased the risk associated with the zero inventory principle. Having lived through several Lean implementations, I used to be a strong believer in zero inventories. But I’ve come to realize that while inventory reduction is still a goal to be striven for; the RIGHT amount of inventory is going to be some quantity greater than zero. I’m not going to go into mathematical theories about how much. I’d probably get most of it wrong anyway. What I will say is that you need to look at your component part sourcing and pick the right amount of inventory for those components;
- Do you have parts that are sourced through a single supplier? When doing this assessment, don’t just look at the supplier. If you can, look at the supplier’s supplier. With the flood in Thailand, not only was the drive assembly impacted, but several component part manufacturers were co-located with the assemblers. When the flood hit the assembly plant, the component plant got hit to. Assembly plants not affected by the flood were still impacted because they couldn’t get parts.
- If you have multiple sources, are those sources in the same geographic area? If an event like the Japan earthquake were to happen, it is likely that both suppliers would be taken down.
- If your source is on the other side of the world, what would happen if there was a major interruption to shipping? A large storm, a significant event at a busy port could delay the shipment of goods by weeks.
If you answer yes to any of these questions, then maybe you should consider holding more inventory on these components. Even if you have multiple sources, you may need to hold enough inventory to cover the lead time needed to get these other sources ramped up to cover the full demand. This might be a good exercise for the Chaos monkey. (Pick a part and simulate what would happen if you couldn’t get this part for a week…or a month…or 3 months). Another related exercise would be to simulate the effect of disabling all suppliers in a given region for 2 months. What would be the impact on your supply chain? How would you recover? I certainly don’t recommend drifting back to the bad old days of building inventory for the sake of building inventory. I also still think that unnecessary inventory is waste. However, there is the right quantity of inventory for each part and those that can figure it out will be better able to survive a significant supply chain event. Are you planning on changing your inventory strategies as a result of recent events? If so, comment back and let us know.
I agree that adding alternate suppliers is an excellent approach to mitigating the risks described in the article. However, this step doesn't necessarily eliminate the need for some level of buffer inventory. Instead, by adding alternate sources of supply, you can reduce the amount of buffer needed. Let's assume that you have two suppliers for a key component and each supply 50% of the demand for this component. Now let's assume that one of the suppliers is shut down for 4 weeks due to a major disaster. How long will it take for the alternate supplier to ramp up to satisfy the full demand? What about orders that the impacted supplier was working on when the disaster occurred? Can the alternate supplier step up and satisfy those requirements on time? So you can see that while you wouldn't need as much buffer inventory as you would if you only had one source but you would still need some...perhaps more then you are currently carrying.
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