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The Latest Installment to the Two Sides of Supply Chain Disruption

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The following is a guest blog commentary published on the Supply Chain Expert Community web site.

The automotive industry continues to encounter some significant learning regarding major supply chain disruption and mitigating global supply chain risk.  In 2011, the effects of the massive earthquake and tsunami that impacted northern Japan, followed by the massive flooding in Thailand brought about by an unusually strong monsoon event led to a new awareness of supply risk that extended to critical components at the lowest tiers of the value-chain. In March of this year, Supply Chain Matters provided updated commentary regarding this learning, along with efforts being taken by major Japan based Automotive OEM’s to mitigate such risks in the future.

Last week, major automotive manufacturers in Japan reported results from their March ending fiscal year closings, collectively forecasting record production volumes and increased profits for the coming fiscal year.  Toyota and Honda, both severely impacted by supply disruption, reported optimistic forecasts for the upcoming 2013 fiscal year, but not without the need for aggressive sales campaigns. The Financial Times reported that Toyota produced 2.5 million vehicles in its March ending fiscal year, surpassing both Volkswagen and General Motors annual output. The company however incurred a 2.2 percent decrease in annual revenues and a 24 percent decrease in operating income. According to its annual reporting, Honda produced slightly under one million units (988 thousand), noting increased output for the North America market but decreased output in Asia due to the ongoing effects of the Thailand floods. Honda had both of its Thailand car assembly plants totally underwater directly after the floods. Honda’s profitability levels within its automotive group have recovered to just under FY10 levels.

The most significant headline, however, is that of Nissan, which reported robust 7 percent increase in operating income, exceeding the results of its larger Japanese rivals. Both the Financial Times and the Wall Street Journal noted that Nissan was the quickest of Japan’s big three auto makers to recover. With this headline comes the reminder of the two sides of major supply chain disruption, turning disaster into an industry opportunity because of more agile and responsive supply chain capabilities. Two weeks after the quake struck Japan, Nissan indicated that it had assessed all of its suppliers and production facilities and determined that the situation was not as dire as some had originally predicted. Nissan resumed partial production on March 24, 2011 utilizing inventory of components and parts, supplemented by parts from overseas factories. The majority of Nissan’s global production capacity was external to Japan and Thailand. In early April of 2011, Nissan took bold actions in shipping V6 engines from its U.S. based Tennessee engine factory directly to Japan to keep its assembly plants operating. The same agility occurred after the Thai floods struck. In February, Nissan’s COO asked all of its suppliers to disclose details of their component supply network.

After these incidents, Honda has since announced its intention to shift a major portion of its production capacity into North America over the next few years, as a hedge to future major supply disruptions.  Toyota remains committed to a significant manufacturing presence within Japan and has embarked on an aggressive goal aimed to restore any of its manufacturing operations in just two weeks after the occurrence of a major disaster.  Preliminary analysis uncovered that some 300 production and/or supplier locations could be at risk.

One year after the original Japan quake, the financial and operational impacts to supply chains, to the bottom line, and to stock price remain. As noted in our March commentary, we as a supply chain community need to continue to have a more risk aware perspective to the profile of the global value-chain, along with an assessment of what sourcing, analytical assessment and risk response areas need to be shored-up for mitigating such events in the future.

The evolving lessons from the automotive industry continue as an ongoing reminder of the importance of identifying and mitigating risk.

Bob Ferrari

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