The semi-conductor, or computer chips shortage continues to be the dominant news in the automotive supply chain world. The latest analysis by the consultancy AlixPartners suggests that the ongoing semi-conductor shortage will cost the global automotive industry $110bn in lost revenues this year. AlixPartners forecasts that as a result of the shortage, production of 3.9m vehicles will be lost in 2021. The chip crisis has been triggered by the COVID pandemic and then further exacerbated by events such as a fire in a key chip-making plant in Tokyo, extreme weather in Texas and a drought in Taiwan.

While the auto manufacturing industry is gripped by a semi-conductor shortage, Japan’s Toyota Motor Corp. announced it wasn’t expecting a shortfall of semi-conductors to affect its production. Chief Financial Officer Kenta Kon said that as part of its business continuity plans, Toyota had secured “one to four months of stocks as necessary” for various components.

So, what has Toyota done differently? Ironically, it decided to move away from the just-in-time manufacturing approach it invented in the 1970s, which has since been the dominant inventory and manufacturing approach in the auto manufacturing industry. Just-in-time manufacturing, or lean manufacturing, is commonly used to run assembly lines, but when nothing is running on time it makes sense to rethink the supply chain model. For certain components, Toyota asked its suppliers to stockpile parts, the antithesis of just-in-time manufacturing. The on-hand inventory held by Toyota’s largest supplier, Denso Corp., rose to around 50 days’ worth of supply in the year ended March 2020, up from 38 days in 2011. More inventory benchmarking information can be found on GSCi.

Faced with parts shortages and the consequent production delays, other auto manufacturers are also trying to undo the just-in-time inventory and production approach to some degree. Ford started stockpiling key parts and materials and using multiple sources. Volkswagen is building six factories so it can produce its own batteries. Tesla moves into raw materials production. In other words, they are trying to create more resilient supply chains.

Despite these adjustments, it is unlikely that auto manufacturers will want to entirely replace just-in-time manufacturing. Because ultimately, holding lower SKUs has advantages as it eliminates waste and cut costs, so the savings and efficiencies are too great. The greatest adjustments will be made in areas of greatest vulnerability. This means stockpiling more critical parts, especially if they are irreplaceable like semiconductors.

While these measures should alleviate the problem to some extent, they are not enough. Alongside increasing inventory levels to some degree, auto manufacturers will have to accelerate investment into technologies, particularly visibility technologies and control-towers to reduce risks and manage supply chains better. End-to-end supply chain planning systems including control towers, inventory optimization and advanced analytics should help manufacturers mitigate some of the risks associated with just-in-time.

Source: Transport Intelligence, May 18, 2021

Author: Violeta Keckarovska

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