Previously, we wrote about supply chain disruptions due to COVID-19. Due to these disruptions, long-term practices will evolve. To learn more, this post looks at h-u-g-e changes in the auto Industry supply chain.
First, review these relevant posts:
- 2021 Tips for Supply Chain Management
- Handling Supply Chain Disruptions
- The Importance of Enhancing Inventory Management
Not Just in Time: H-U-G-E Changes in the Auto Industry Supply Chain
We begin with an overview of supply chain management, Then, we move on to just-in-time inventory management. And we conclude with the seismic changes coming to supply chain management. With the return of traditional planning.
Overview of Supply Chain Management
The intent of inventory management is to provide a continuous flow of goods and to rnatch the quantity of goods kept in invento1y as closely as possible with customer demand. When production or consumption is seasonal or erratic, this can be particularly difficult. Supply chain .management has broad implications:·A manufacturer or service firm cannot afford to be out of a critical part that could halt its business. Yet inventory on hand should not be too large because the costs of storing raw materials, .parts, and/or finished products can be substantial. If models change yearly, as with autos, large inventories can adversely affect new-product sales or rentals. Excessive stock may also lead to stale goods, cause a firm to mark down prices, and tie up funds.
Just-in-Time Inventory Management
For the last few decades, a lot of companies used either or both of two complementary concepts to improve their inventory manage1nent: a just-in-time inventory system and electronic data interchange. With a just-in-time (JIT) inventory system, a purchasing firm reduces the amount of inventory it keeps on hand by ordering more often and in lower quantity. This means better planning and data by the buyer. Collaborative computer systems. Geographically closer sellers. Improved buyer-seller relationships. And and better production and distribution facilities.
Yet, if the supply chain falter, problems may arise. As the following figure indicates.
The Revival of Traditional Supply Chain of Management
Because of supply chain problems, many companies are returning to traditional practices. Thereby, backing away from JIT.
Consider these observations by Sean McLain, reporting for the Wall Street Journal:
Toyota is stockpiling up to four months of some parts. Volkswagen is building six factories for its own batteries. And, in shades of Henry Ford, Tesla wants to lock up access to raw materials.
[As a result], the hyper-efficient auto supply chain symbolized by “just in time” is undergoing its biggest transformation in more than half a century. Accelerated by the troubles car makers suffered during the pandemic. After sudden swings in demand, freak weather, and a series of accidents, they are reassessing basic assumption that they could always get parts they needed when they needed.
“The just-in-time model is designed for supply chain efficiencies and economies of scale,” said Ashwani Gupta, Nissan’s COO. “The repercussions of an unprecedented crisis like COVID highlight the fragility of our supply-chain model.”
Take Ford and its F-150 pickup, the best-selling vehicle in the U.S. The latest version is crammed with technology including a hybrid gas-electric drive. As well as automatic Tesla-style software updates. With vaccinations beginning to beat back COVID-19, customers bought around 200,000 F-150s in the first quarter of 2021. Its best retail start in 13 years. Yet, now supply is short. Truck factories were shut down or had limited production for all of April. And a slowdown will likely continue through at least mid-May. The hit to pretax profit is as much as $2.5 billion.
Executives don’t want to replace JIT entirely. Because savings are too great. But they want to undo it to some degree. Focusing on areas of greatest vulnerability. They will stockpile more critical parts. Especially if they are light and relatively inexpensive yet irreplaceable. Such as semiconductors.
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