Japan marches ahead as its citizens, families, businesses, economy and society start to emerge from disastrous, deadly and destructive impacts of the March 11, 2011 Tohoku earthquake and tsunami. A uniquely Japanese institution that will also need to emerge from scathing and in my view unfair criticisms leveled on it in recent days is the Just-In-Time (JIT) manufacturing and inventory management strategy. JIT has inspired corporations worldwide to significantly reduce inventory of parts and components that go into assembly lines from weeks to days and sometimes to mere hours of supply. This disaster has shined the light on the word’s reliance on supply lines from Japan to keep assembly lines operational around the world.
In the days following the quake, lean inventories prescribed by JIT have gotten leaner and latent resulting in well publicized production shut-downs, slow-downs and supply disruptions for automakers & hi-tech OEMs including General Motors, Ford Motor, Texas Instruments among numerous others. Apple’s iPad2 and Boeing’s Dreamliner will also likely be impacted. Recent articles in The Wall Street Journal, Reuters and Businessweek in highlighting downsides to Just-In-Time manufacturing techniques have stirred debates prompting the Kanban-faithful to defend their turf vigorously.
But this isn’t your garden variety natural disaster, and Japan is no ordinary supply source. 9.0 magnitude earthquakes and 33-ft high tidal waves aren’t exogenous events that most supply chains are designed to overcome on a regular basis. Japan has now emerged as the most important source for a wide variety of components in many a production line. Loss of power for even a few seconds can ruin entire production runs of hi-tech components, so the effects of 130 plans having to close as of late March 2011 will be experienced for a long time. Japan’s critical role to keep factories operational globally are evidenced by these illustrations contained in the three above-mentioned articles:
- Japanese companies design and supply 35% of Boeing’s new 787 Dreamliner airplane
- Hitachi makes 60% of the world’s airflow sensors used to measure air coming into automotive engines
- Japanese factories make one-fifth of the world’s semiconductor and 40% of electronic components.
- Research firm IHS iSuppli estimates that Japan accounts for about 60% of the world’s supply of silicon wafers that are foundational to computer chips.
- Sony makes 10% of the world’s computer batteries
- Toshiba makes 25% of the NAND flash chips globally
- Japan reportedly makes 90% of a substance called BT resin used to make printed circuit boards
And the list goes on, helping make the obvious yet vital point that OEMs rely heavily on Japanese component suppliers. JIT manufacturing that decries raw material and component inventory buildup at assembly lines has become an easy, yet I believe unfair target in this process. Going back to 60 days-of-supply will hurt balance sheets without really resolving some of the fundamental beyond-the-headlines type structural issues. Every company needs to utilize these series of events as a wake up call to evaluate their supply chain risk mitigation strategies.
Carrying excess inventory as central to one’s strategy to lower overall risk is tantamount to ignoring other weak links in corporate supply chains. If anything, the current crisis in Japan should inspire companies to invest in formulating a robust supply chain risk management framework that looks at risk mitigation from a wide variety of angles including:
- Single supply sources: The economic advantage, ease of management and assurances of intellectual property protection have prompted many a company to go all-in with one partner to supply components vital to their operations. Supplier diversification and a proven, tested and operational method to switch to alternative supply sources, including near-shore sources without disrupting production lines is vital.
- Collaborate, Communicate, Automate: It has been said in the context of this month’s incidents that “information” has become the most sought after export from Japan. A collaborative framework that transcends languages, timezones or technical capabilities while helping integrate suppliers, vendors, sub contract manufacturers and logistics providers is vital in good times and imperative in bad times.
- Monitor, Adapt. Repeat: It has become necessary to continuously monitor supplier conformance with mandates ranging from environmental and other sustainability initiatives, consumer safety requirements such as CPSIA, regulatory compliance with governmental requirements such as RoHA, REACH, Importer Security Filings / ISF 10+2, to name but a few. The ability to look beyond supply bottlenecks swiftly when preferred suppliers are impacted by any of these would have a direct impact on quarterly earnings calls.