DETROIT (May 8, 4 p.m. ET) — One might expect the shortage of nylon 12 — a material used to coat fuel lines and other components — to cause the auto industry to abandon just-in-time parts delivery.
After all, wouldn't it be better to fill warehouses with parts or raw materials than to risk a shortage that could shut down an assembly plant?
Well, no. Instead, automakers and suppliers are working to line up multiple producers of key raw materials to avoid the kind of disruption caused by the March 31 explosion that wrecked Evonik Industries AG's cyclododecatriene factory in Marl, Germany.
Automakers and suppliers also are trying to make it easier to switch to new raw materials if bottlenecks develop.
The auto industry has become acutely aware of the dangers of a supply chain in which one Tier 3 manufacturer might produce the bulk of a key raw material such as nylon 12.
But profit margins usually are too thin to permit suppliers to fill warehouses with parts or raw materials.
“Inventory is dead money,” says J. Scot Sharland, executive director of the Automotive Industry Action Group, a suburban Detroit trade group that represents 870 automakers and suppliers. “Nobody wants extra inventory.”
But there are exceptions. Last year, Freudenberg-NOK stocked up on several months' worth of fluoropolymers, a key raw material used in a variety of seals. The company wanted to make sure it wasn't blindsided by shortages.
“Inventory has become a bad word,” says Brad Norton, president of Freudenberg-NOK, the suburban Detroit maker of engine and other seals. “Everybody wants to be lean. But securing our supply offset some of the disadvantages of tying up working capital.”
A warehouse filled with inventory carries its own risks, Sharland notes.
If an automaker re-engineers the component, will the supplier's inventory become obsolete? If the material is shipped overseas, will international currency fluctuations drive up the material's cost? And if returnable containers are used to ship the commodity, can the suppler obtain enough to store the extra inventory?
“You can't find enough returnable containers to hoard stuff,” Sharland says. “You don't want to go there if you can help it.”
Meanwhile, the industry is striving to make it easier to switch to new raw materials if bottlenecks develop.
Last week, AIAG unveiled a standardized procedure to let suppliers get a customer's approval to switch raw materials within three or four weeks. That would help ease the industry's reliance on nylon 12, which is likely to remain in short supply for the rest of the year.
The takeaway? Sharland says automakers and suppliers must redouble their efforts to identify potential bottlenecks among Tier 2, Tier 3 and Tier 4 suppliers.
For example, automakers had identified at least two major global suppliers of nylon 12, Evonik and Arkema Group. But automakers didn't realize that Arkema bought cyclododecatriene — a key ingredient used in nylon 12 — from Evonik.
Well, they know that now. “If there is a lesson to be learned, maybe it's that we have to take a deeper dive to identify production materials,” Sharland says. “This underscores the complexity of the supply chain.”