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Automotive
October 20, 2020 04:05 PM

Did COVID poke hole in just-in-time practices?

Alexa St. John
Automotive News
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    North America's supply base has toiled for decades to make itself lean and cost efficient. But suddenly, that thinking is being reconsidered because of this year's coronavirus pandemic.

    North America's supply base has toiled for decades to make itself lean and cost efficient, operating just-in-time delivery systems, eliminating wasteful practices and sourcing parts and materials from low-cost countries such as China and Thailand.

    But suddenly, that thinking is being reconsidered, according to a new survey of manufacturing executives.

    The reason? This year's coronavirus pandemic.

    Since the early 1980s, Toyota, Honda and Nissan have pressed U.S. suppliers to adopt just-in-time production procedures. Rather than churning out parts indiscriminately and storing them in warehouses to ship when convenient, just-in-time asked suppliers to make only the specific parts that are needed, and to deliver them precisely when the customer is ready.

    Ann Marie Uetz

    But auto companies are now entertaining a different view of that, says Ann Marie Uetz, a partner in the Foley & Lardner law firm who works with 100 or so auto suppliers.

    Uetz said the firm's survey in June and July of 150 manufacturing executives, including some non-automotive businesses, found nearly two-thirds said they believe there will be a shift away from the just-in-time model. And many are planning to turn to greater use of warehousing — long viewed as a crutch for inefficient suppliers — to protect themselves from the disruptions still threatening to bring down supply chains and assembly plants.

    According to Uetz, the emerging thinking is that a choice has to be made between continuing to operate as inexpensively as possible or taking new precautions to be more resilient — even if it means accepting added cost.

    "Is resiliency in the supply chain most important, or is cost most important?" she asked. "How do you weigh those against each other?"

    The trauma of the pandemic, she said, is forcing some supplier executives "to consider something besides cost."

    Laurie Harbour is picking up on the same vibe in the North American supply base. But there is a more critical problem to deal with first.

    Harbour, CEO of the suburban Detroit auto manufacturing consultancy Harbour Results, said in a presentation of her latest industry forecast last week that the top concern of automotive companies is survival.

    "Many of them are very concerned about cancellation of programs. We've seen some bankruptcies," said Harbour, who works with Tier 2 and Tier 3 suppliers around the country.

    "We've seen many of them pull down lines of credit to bring working capital in their business. They've restructured their corporate debt. They have cut payroll. They still have, in some cases, people furloughed," she added. "Most suppliers are working to stabilize their business."

    But once the industry base has stabilized, she said, based on her conversations with executives, a new operating attitude is going to emerge.

    Laurie Harbour

    "They will build contingency plans to weather future challenges," she predicted of suppliers. "They will work to better manage their supply base to ensure no further shutdowns in the supply chain. They will likely have backup suppliers for key parts, and potential double tooling for critical parts."

    That costs money

    All of these resolutions could add cost to supply chains.

    Uetz predicted the U.S. market for warehousing is going to boom as a result of the auto industry shift. In many markets, including Detroit, high-quality industrial space is in tight supply.

    She said manufacturers also indicate they now want to consider dual sourcing of parts — counting on two companies to produce the same or similar components in case one is brought down by a crisis.

    That practice was once more common than it is today. Auto makers and Tier 1 suppliers have moved away from it primarily to reduce costs, such as the expense of having two sets of tooling.

    Supplier executives also say they want to shorten supply lines to reduce their vulnerability, Uetz said, opting for suppliers that are geographically closer, even if it means dropping less expensive sources in low-cost countries, such as China, Vietnam or India.

    But Uetz cautioned that the changes will not likely be abrupt.

    "I don't think any of this is going to be wholesale, where everybody moves out of China, or wholesale, everybody starts banking parts or starts dual sourcing," Uetz said. "But these things are getting a look."

    Just in time?

    Randy Pflughaupt, group vice president of supply chain management for Toyota Motor North America, acknowledges the urgency of the moment and accepts that change may be coming in North America. But he doesn't believe the industry will give up the efficiency of just-in-time.

    Randy Pflughaupt

    "We will be making some near-term adjustments," Pflughaupt said of the industry. "We will be doing what we need to do. I just don't think that this particular crisis is going to drive that dramatic of a change in those things going forward."

    Pflughaupt last week announced his retirement after 38 years with Toyota, effective at the end of this month. Toyota and its supplier managers have worked for decades to help North American companies develop more efficient, cost-conscious ways of moving parts from factory to factory to final assembly.

    Pflughaupt recalled that winning over early skeptics of the just-in-time model came when suppliers "recognized that nobody's making money having parts sitting," he told Automotive News.

    "The money is made in the creation of the part, the movement of the part, the part then being turned into the next finished good," he said. "Just-in-time orientation, and not carrying a lot of inventory, is a much more profitable way to operate."

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