The U.S. government is going to weigh in on these supply chain matters. I think that its heart is in the right place. President Joe Biden has signed an executive order directing a 100-day review of three critical supply chain areas, including automotive.
It is not easy to discern what would come out of this government action, other than regulation supporting one or more of the four points that I summarize at the end of this article.
At any rate, if a company decides to carry inventory so it can weather these supply chain issues, it must bear the related cost. These costs could include securing warehouse space, equipment and system expansion to manage the inventory; transportation contracts to distribute inventory; obsolescence; and so on. These types of costs can cut into the bottom line. When you are not in the throes of disruption, it can look pretty foolish (to an executive with a short memory) to hold that much inventory.
Ten years ago, General Motors’ then-Chief Global Manufacturing Officer Diana Tremblay said: “Years ago you had a lot of stock lying around. The big change is that there’s not all that inventory lying around anymore. It’s far better not to have all that inventory. But the opposite is true when you have supply chain disruptions. That’s the trade-off. On balance, it’s still the right thing to do.”
Sure, except that Toyota, around the time that article was written, decided that not having extra inventory lying around was no longer the right thing to do. Toyota drew a line in the sand, and apparently, it will work for them.
According to a CNBC report in February this year, “One of the only outliers so far is Toyota Motor, which on Wednesday said it has as much as a four-month stockpile of chips and was not immediately expecting the global shortage to hit production, according to Reuters.” While Toyota eventually had some production stoppages, it has been less impacted because of steps the automaker took to hold inventory in microchips.
Unlike Toyota, however, most companies’ plan to handle supply chain disruption seems to be, “We are going to keep inventory as low as possible, and simply weather the storm when it comes.”
That’s fine, but then no one should complain or be surprised when everything slows down or stops.
Automotive companies must change the way they prepare for and react to supply chain disruption.
These companies must look internally, and get their own houses in order. Ten to 12 years ago, the current advanced tools and technology weren’t available to help mitigate risk and disruptions. Companies were forced to rely on the personal whims of decision-makers and spreadsheet divination to manage their supply base. The good news is that these companies now have tools such as supplier information portals, e-sourcing systems and demand planning software that provide a much greater array of information for decision-making. Using these tools, management can decide whether to:
1. Hold inventory, especially in key at-risk components
2. Diversify the supply base
3. Increase order lead times
4. Invest in process and tools
Change is inevitable. We are going to be hit by additional worker strikes, weather events and geopolitical issues. Now is the time to do things differently and stop the insanity.