It is ironic that the just-in-time model of industrial production, pioneered in Japan, will undergo a global supply chain stress test as a result of the recent 9.0 Richter scale earthquake, tsunami, and resulting ongoing nuclear power reactor crises that has crippled the Japanese economy.
Just-In-Time Industrial Production Methods Tested by Disasters in Japan
The Japanese just-in-time production model gained traction in the 1970s and 1980s with manufacturing companies as a way to increase corporate profits by reducing raw material and component part inventories and the funds required to finance those inventories. The just-in-time production model was adopted by manufacturing firms the world over as computer software, transportation networks, and production techniques were developed that allowed manufacturers to keep production lines running smoothly with a minimum of inventories required to be purchased and stockpiled by the factory. The entire supply chain was carefully orchestrated so that each part for an assembly arrived at the right place on the assembly line just-in-time to complete the next step in the manufacturing process.
This method of production requires a high level of sophistication in acquiring raw materials and components. In order to keep assembly lines running smoothly it requires that any problems in acquiring raw materials or parts from one supplier can be quickly solved and that alternate sources can be quickly located and transported to the assembly line. For global operations managers, as reported in The New York Times, in an article with the title "Stress Test for the Global Supply Chain" by Steve Lohr, published: March 19, 2011, the triple whammy of disasters just experienced by Japan will be a severe stress test of their supply networks and systems.
Globalization Increases Risks of Supply Chain interruption
With globalization all sorts of parts, especially those for the electronics and automotive industries, are made in Japan and shipped all over the world. The assembly factories may be located in dozens of nations. As an example, two Japanese companies are the world's leading producers of silicone wafers, accounting for approximately 60% of the world's supply. Silicon wafers are then used to make computer chips. Major chip makers like Intel, Samsung, and Toshiba generally keep small inventories of silicone wafers on hand as emergency supplies. Should shipments be interrupted, the just-in-time production model doesn't provide much of a margin to deal with a long-term supply interruption.
Loss of One Part Can Cause Close Down of Entire Factory
The inability to quickly source parts can cause the shut down of an entire huge factory. In Japan, many parts plants have closed with restart dates unknown. The effect worldwide is already being felt. For example, in Louisiana a General Motors truck plant announced last week that it was shutting down due to a lack of made-in-Japan component parts. For many manufacturers made-in-Japan parts shortage situations are sure to come. Significant numbers of factories in Japan are struggling to resume production in the face of in extreme cases heavily damaged or destroyed factories and in many cases diminished electricity supplies and disruptions caused by damaged transportation networks.
At the very least the disasters in Japan will require that manufacturing companies reevaluate the risk in their supply chains. The use of the just-in-time manufacturing model may be modified to reflect more of a just-in-case mentality. That would probably involve carrying larger inventories as well as increasing redundancy by dealing with larger numbers of suppliers in widespread geographical locations. Any minor decreases in corporate earnings would be offset by a reduction in stress for managers as the possibility of lost production due to sudden interruptions to their company's supply chain decreases.
Gerald Greene - Technology may save the world but it is a hard task master. It takes increasing amounts of work to keep up with the latest and greatest.
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