Will the auto industry rethink supply chain disruption now?

Have you ever had that sinking feeling that you have experienced something previously that you are going through again? The current microchip shortage affecting the automotive industry is definitely giving me that feeling.

What happened, exactly? Too many companies increased their orders of microchips at the same time during the beginning of the COVID-19 pandemic. Because of the 14-week lead time, the recurring automotive orders could not be filled.

It wasn't that the demand for vehicles, and thus the demand for chips, did not change significantly early in 2020. What the chip manufacturers and the automotive companies missed, or misread, was the demand for chips coming from outside of automotive — demand driven by the pandemic. New generations of smartphones, new gaming consoles and an increased demand in IT infrastructure and PC hardware resulting from the fact that many people have been forced to work remotely all drove increased nonautomotive demand for chips. And it will hurt.

For Dan Hearsch, managing director of automotive and industrial at AlixPartners, it looks like this "all the way up and down the supply chain, everybody is out some portion of money. This could be 10 percent of global demand this year, its impact, which craters the recovery. We don't think we're overstating this."

This chip shortage, in my opinion, is simply the latest in a long line of supply chain disruptions that have forced the automotive industry to rethink its supply chains and strategize a new way forward. Every time there is a major disruption to the supply chain in automotive, people always ask the same questions. Should we:

• Carry more inventory?

• Rethink just-in-time and lean principles?

• Have a more diverse supply base?

If we do, will it solve the problem?

Here's a trip down memory lane, referring to a disruptive event from days gone by:

"We'll see a surge now in companies talking about diversification. But as this fades into memory, decision-makers will not take disruptive events into account to the extent that they should. ... In six months they'll discount the risk all over again."

That quote is from Sunil Chopra, a professor of operations management and information systems at the Kellogg School of Management at Northwestern University, and it was published in 2011. He said at most automakers and Tier 1 suppliers, not much changes after supply chain disruptions. Once they're over, automakers and suppliers go back to business as usual until the next earthquake, tsunami, flood, strike or other event causes a new disruption in the supply chain.

I think automotive companies need to be forthcoming about whether they will walk the razor's edge of inventory, and be at the mercy of every aberration in the supply chain, or if they will rethink just in time, diversify their supply base and hold key inventory. And also whether they will increase their order lead time.

The U.S. government is going to weigh in on these supply chain matters. I think that its heart is in the right place. President Joe Biden has signed an executive order directing a 100-day review of three critical supply chain areas, including automotive.

It is not easy to discern what would come out of this government action, other than regulation supporting one or more of the four points that I summarize at the end of this article.

At any rate, if a company decides to carry inventory so it can weather these supply chain issues, it must bear the related cost. These costs could include securing warehouse space, equipment and system expansion to manage the inventory; transportation contracts to distribute inventory; obsolescence; and so on. These types of costs can cut into the bottom line. When you are not in the throes of disruption, it can look pretty foolish (to an executive with a short memory) to hold that much inventory.

Ten years ago, General Motors' then-Chief Global Manufacturing Officer Diana Tremblay said: "Years ago you had a lot of stock lying around. The big change is that there's not all that inventory lying around anymore. It's far better not to have all that inventory. But the opposite is true when you have supply chain disruptions. That's the trade-off. On balance, it's still the right thing to do."

Sure, except that Toyota, around the time that article was written, decided that not having extra inventory lying around was no longer the right thing to do. Toyota drew a line in the sand, and apparently, it will work for them.

According to a CNBC report in February this year, "One of the only outliers so far is Toyota Motor, which on Wednesday said it has as much as a four-month stockpile of chips and was not immediately expecting the global shortage to hit production, according to Reuters." While Toyota eventually had some production stoppages, it has been less impacted because of steps the automaker took to hold inventory in microchips.

Unlike Toyota, however, most companies' plan to handle supply chain disruption seems to be, "We are going to keep inventory as low as possible, and simply weather the storm when it comes."

That's fine, but then no one should complain or be surprised when everything slows down or stops.

Automotive companies must change the way they prepare for and react to supply chain disruption.

These companies must look internally, and get their own houses in order. Ten to 12 years ago, the current advanced tools and technology weren't available to help mitigate risk and disruptions. Companies were forced to rely on the personal whims of decision-makers and spreadsheet divination to manage their supply base. The good news is that these companies now have tools such as supplier information portals, e-sourcing systems and demand planning software that provide a much greater array of information for decision-making. Using these tools, management can decide whether to:

1. Hold inventory, especially in key at-risk components

2. Diversify the supply base

3. Increase order lead times

4. Invest in process and tools

Change is inevitable. We are going to be hit by additional worker strikes, weather events and geopolitical issues. Now is the time to do things differently and stop the insanity.