Automotive industry supply chains need a shake up

Lean manufacturing, product recalls and part sharing all have a significant influence in the automotive industry's supply chain
 Automotive supply chain

Written by Antony Bourne, Global Industry Director, IFS

The automotive industry is still recoiling from the effects of the devastating earthquake and tsunami that hit Japan in mid-March. Manufacturing association JAMA recently announced that Japanese producers have now lost more than 500,000 units of production, with Honda, Toyota, Nissan and Ford experiencing supply shortages and reduced productivity.  Ford has had to stop taking new orders for cars in certain colours due to a pigment shortage, and Toyota recently confirmed that whilst all its domestic plants have now resumed operations, the plants are operating at only 50 percent of production due to parts shortages.

These new problems compound other supply chain issues that have troubled the automotive industry in recent times. For example, the industry is no stranger to product recalls, with the Vehicle and Operator Services Agency (VOSA) recording a staggering 492 recalls in 2010. Whilst the majority of these only affect small numbers of vehicles, the stories that have hit the newsstands involve millions of recalls at a time.  Notably, Toyota recalled 1.7 million cars worldwide over fuel leak concerns in March this year.

All of this raises an important question: how can automotive supply chains be strengthened to prevent recalls or lessen their impact, or to cope better with events such as the Japanese earthquake?

To begin answering this, some key operational factors need to be considered. For example, the increasing reliance on part-sharing within manufacturing lines has made automotive supply chains more vulnerable to disruption. Instead of having three different engine switches for three different models, manufacturers are increasingly combining requirements into a single part. Therefore, when a part fails or is short on supply, the impact of the recall or shortage is more widely felt. Whilst part-sharing is beneficial for inventory levels and purchasing costs, it does mean that if anything goes wrong with the switch, or it cannot be produced to meet demand, then the impact is three times greater. 

Additionally, the uptake of lean manufacturing principles has placed strain on the supply chain. Since automotive companies are under pressure to reduce inventory levels, they often prefer to set up supplier consignment stock. However, this can lead to quality issues: because the manufacturer may only check the quality of the supplier’s stock at the time of use, it means it is often too late alter production plans without causing significant disruption. Lean methodologies have also complicated the industry’s recovery following the Japanese earthquake, as manufacturers with lower stock levels don’t have the built-in resiliency they require to maintain productivity in the event of parts shortages.

Focusing specifically on recalls, there’s no denying that they quickly become logistical nightmares.  Once a recall has been planned, the pressure on the supplier can be enormous: they must ensure that they can produce the amount of parts required, plus coordinate their shipment worldwide.  Assembly plants and service centres will feel the strain, even more so if they have to process faulty product returns. This aspect can complicate the social responsibility policies that car manufacturers often promote, and ultimately damage brand awareness. And of course, there is the sheer expense of a recall: a new switch may only cost £1 to produce but by the time logistics, fitting, and marketing costs have been calculated the overall expense increases dramatically.

In order to avoid recalls, manufacturers must prioritise the quality control aspect of the supply chain and review their IT systems. The overall quality system needs to extend across the entire supply chain as opposed to just when parts arrive in ‘goods inwards’.  Vigorous supplier audits also need to take place more regularly to ensure that the supplier isn’t cutting any corners to meet agreed prices and demand forecasts. By having an integrated quality management system, the risk of recalls and all their associated costs can be minimised.  Advances in technologies like Enterprise Resource Planning (ERP) systems mean that there are now ample quality control tools available to ensure that the manufacturing process is checked rigorously, at the right time.

Similarly, regarding disastrous events such as the Japanese earthquake, ERP systems that are integrated on a global scale can help with sourcing stock in times of dire need. However, this is dependent on stock being available in the first place, which is not guaranteed when businesses are operating according to lean manufacturing principles.

So the broad answer to the crucial question above is that businesses urgently need to focus on how they balance improving their bottom line and competitiveness against the risks to supply chain such improvements may generate. Although this requires a business and risk assessment that is beyond the scope of this article to discuss in detail, it’s important to note that, as IT systems play a critical role in the operation of supply chains, they therefore should be a key part of any operational assessment. It may be that automotive manufacturers could improve the use of their current systems, or introduce better systems, in order to find a better balance between risk and return. 

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