Impact Manufacturing

Parts shortages caused by the earthquake/tsunami disaster shouldn’t reverse the hard-won financial gains of inventory reduction.
By Jason Tuma, CPA

The disaster in Japan — a major supplier of parts and materials to North American companies — has raised questions about the risks of lean inventory management, a practice that increases cash flow and lowers costs for manufacturers. Some car companies report that resulting car shortages will last into the fall — months after the March tragedy — because their Japanese suppliers are still in flux. 

While what is happening in Japan is both rare and extreme, it has shed light on the need for manufacturers to be diligent about demand-management strategies. This doesn’t mean, though, that lean inventory practices are too risky to maintain.

 Producers of electronic devices, gaming software, cosmetics, jewelry, toys, and other popular consumer goods have fallen short of meeting demand in recent years, long before the events in Japan. Currently, a chronic shortage of drugs to treat cancer, ADHD, and other medical conditions is causing some hospitals to ration treatment. According to a May 4, 2011, report in the Salt Lake City Deseret News, 2010 had the highest number of drug shortages ever in the United States (211 drugs), and so far 2011 is outpacing 2010. What’s causing the shortages? Manufacturers can’t keep up with demand. 

No disaster is to blame for these shortages. Companies simply miscalculated demand and therefore risked customer loyalty and lost countless opportunities to make a sale.

 The message for manufacturers is this — don’t be frightened into reversing gains achieved from the hard work of reducing inventories because of parts and materials shortages caused by the unforeseen events in Japan. Do, however, revisit your demand-planning strategies to make sure your company will be able to meet demand during potential disruptions. 

We now know that those disruptions could include natural disasters happening far from where finished goods are assembled. This has not always been a significant consideration in demand planning because supply chains have not always been so globally dispersed. But today, a natural disaster hitting the other side of the world could do devastating, long-term damage to North American goods producers.

Of course, each company is unique, and so each solution will be unique. I’m actually looking forward to seeing how some of the most innovative North American manufacturers address this issue in the coming months. I doubt filling warehouses with idle parts will be on their list of solutions. More likely, they will restructure their supply chains to be more geographically diverse so that if one area is flooded, hit by a hurricane, or in the throes of chaos after a quake, another supplier in a different location could fill the pipeline. 

There might also be some movement away for universal (cross-platform) componentry. While using common parts and assemblies is one way that Toyota has kept quality high and product-development costs low, it caused the company to suffer shortages across its product lineup after the disaster. If some car models had been using parts/assemblies made entirely in North America, the company might have been able to avoid production stoppages for at least some of its product line.

Another model could be the sharing of nonproprietary safety stock in strategic locations with competitors. We’ve seen something similar to this in logistics when costs rise drastically to transport goods — who cares if you share truck or warehouse space for raw materials with a competitor? The raw materials aren’t turned into valuable goods until they enter your plant. Unless the materials are of a proprietary nature, sharing safety-stock locations and transport services could be a viable alternative to reducing cash flow and pushing up inventory costs just in case a natural disaster strikes. 

Manufacturers have struggled with multiple aspects of operating in a global economy but have always bounced back with solutions that make them even more competitive. I’m sure this will be the case with planning demand to meet the challenge of unforeseen natural disasters — even when they are half a world away. Don’t forget to join us for our 2011 Impact Manufacturing Forum where we will have speakers on innovation, emerging markets and the economy.