Japanese Tipping Point: Handicapping the Potential for Global Automotive Production Shutdowns

Spend Matters and other procurement and supply chain resources have been warning for nearly all of the past two weeks that companies should take action immediately if they have indirect or direct supply interests in Japan (see recent coverage: here, here and here). From understanding multi-tier exposure to the region to figuring out which supplier facilities are subject to rolling blackouts, the job of the global supplier manager post earthquake and tsunami is a 24-hours right now. Yet even if we do everything right, is it possible that broader industries will be effected for months as a result of the tragedy? In a well-researched piece in the WSJ earlier this month, the publication suggests that the domestic automotive industry "is likely to face sporadic production shutdowns for several months because of shortages of microchips and other parts that had already been scarce prior to Japan's earthquake and tsunami."

Specifically, "tight supplies of microchips and other electronics, sensors, rubber and forged metal parts had already caused auto makers to slow or even temporarily halt production lines before the earthquake." Reading this, it feels the incidents in Japan may in fact be the tipping point to put supply risk and supply disruptions over the edge across the manufacturing sector. Spend Matters research, agreeing with the findings of some of the experts in the article, suggests that reduced supplier access to working capital, higher commodity prices, greater order variability, less visibility into mid-term demand and even new regulations (e.g., conflict minerals) will combine to create a supply headache for companies, resulting, in the worst cases, in reduced output and even production shutdowns.

In certain cases, it's happening already. Consider for example how "Chrysler Group LLC also stopped production at its Windsor, Ont., minivan plant for a week earlier this year because of a shortage of electronic parts" and "General Motors Co. has shut down production at a Shreveport, La., plant that makes small trucks in an effort to ensure there were enough parts available for other vehicle lines." All the air freight capacity and expediting expertise in the world will not be enough to prevent these stoppages from occurring and making the headlines.

But perhaps, as GM has already done, taking preemptive and strategic measures to model the impact of supply disruptions that we know will happen to our businesses in the coming months and taking action to minimize their fallout will be our most important near-term role. After all, if you're looking for alternative suppliers at this point -- or trying to gain visibility into a multitier supply chain for the first time -- it's already too late. It's time, unfortunately, to move into damage control mode and to prioritize relationships and continuity of supply over near-term cost reduction and even cost containment.

Jason Busch

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