Supply Chain Signal: Chip Shortage affects Auto-makers

My readers will know that I am a retired industrial buyer.  I am still in touch with my colleagues in the Institute For Supply Management, and receive various publications.  I also watch for supply-chain stories in the business media, and there is a whopper in the Wall Street Journal this week.

The story is about the worldwide shortage of computer chips affecting the automotive industry.  You will already be aware that newer autos and trucks are increasingly electronic, from engine controls, to automatic windows and doors, to complex “infotainment” screens in the cabin of your car.  All of those electronics contain multiple computer chips, from complex central processors to different kinds of memory chips.  Well, the worldwide government shutdowns in response to the Wuhan Coronavirus pandemic last year wreaked havoc on the chip market.  I saw this in my aerospace job, and it was everywhere.  With all the factory shutdowns, companies large and small; aerospace, industrial, and consumer-product manufacturers canceled their semiconductor orders from their suppliers, so they would not be stuck with inventory they could not build into products.  Auto-makers were among the biggest users of computer chips, after the computer industry itself, and their demand fell off the proverbial cliff.

At the time, in March and April of 2020, no one knew how long the shutdowns would be in effect, so instead of putting orders on hold, they were canceled.  Few companies were ready for the economy to come roaring back in the summer.  Most auto manufacturers, since the late 1970s, have been operating on what is known as the “Toyota Production System”, or just-in-time manufacturing.  Developed by Toyota in the 1960s, it involved manufacturing companies keeping minimal inventory on hand, and having various parts delivered to the factory in quantities need for short-term demand, and often delivered daily direct to the production lines.  This way, the company could avoid overstocking of parts, and the costs of keeping inventory.  TPS works very well, as long as there are no unforeseen interruptions, like earthquakes, snowstorms, broken bridges, or worldwide pandemics.  From the WSJ Article:

In December, the parts flow from Continental, Robert Bosch GmbH and other suppliers had so dried up that VW announced it would stop production of bestselling brands such as Audi and its namesake VW brand at plants in Europe, China, and North America.  Audi, citing a chip shortage, furloughed 10,000 factory workers for the first time since the spring lockdowns.  Ford Motor Co., Honda Motor Co., and others soon reduced output of vehicles from big pickups to compact sedans.

I have been immersed in this kind of manufacturing for at least 20 years, and it works.  Until it doesn’t.  But the kicker in this article that just made me laugh out loud, was that there is one big auto-maker who hasn’t been affected by the chip shortage as much as the others have.  And, that would be Toyota!  And the reason they have not been as adversely affected is stated in the article as “their stockpile” of chips that they needed for production.  Just give that some thought.  Toyota, who has been the largest promoter of lean manufacturing, has now started to ignore their own production system and actually stockpile components.  Someone in procurement at Toyota was forward-thinking enough at the beginning of the pandemic shutdown crisis to make sure they did bring in the chips they would need for production once the factories came back on line.

In the past, Toyota has had an excellent reputation for low-cost, high-quality products, but that reputation has had some stains on it in the last few years, including a big quality scandal where their inspectors were found to be falsifying quality records at their Japanese factories.  So, even all-mighty Toyota is made up of human beings, with human frailties.  This time, they did the right thing and stocked up on computer chips.

2 thoughts on “Supply Chain Signal: Chip Shortage affects Auto-makers

  1. I was introduced to Just In Time in the mid-80s and was amazed at how well it worked over long stretches, while expecting catastrophe when the supply chain was stressed. Thanks for confirming my paranoia. Is the answer more warehouse space? Have our technical designs gotten so complicated with multiplying dependencies that they are now too brittle. Being a software guy, so far my supply of bits and photons hasn’t been compromised, but I occasionally note the mushroom clouds among my logy and engineer friends.

    On 9/11 I was working near Scott AFB, the logistics nexus for air movements throughout the world. Making things move very quickly involved a five mile line of tractor trailers moving at a truck length every five minutes. My motel room was next to the railroad tracks. Rail and air noise abatement rules were suspended instantly. The logistics miracle that ensued was made possible only by a commitment to massive prepositioned supply centers. Of course, government and industry have very different requirements they must address.

    Thanks for the post.

  2. Early on in my Purchasing career, I developed my own variation on “just-in-time”. I called it Just Late. The main reason Toyota was so successful with lean manufacturing, was that the majority of their suppliers were in Japan, within a day’s drive of their factory. It was very little trouble for them to require frequent deliveries to their factory. The US has always been unable to duplicate that condition, and it is nearly impossible to schedule daily deliveries from factories thousands of miles away. Especially when you factor in weather, and shipping charges. My company had a supplier in the UK, who supplied one part that was impossible for any other supplier to duplicate; we literally had to pay to keep them alive when they were close to bankruptcy, as there were no alternatives.

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