Insulating your supply chain against future risks - It can come at a cost

I came across an interesting article today on the Spend Matters blog titled, Toyota: Rebuilding and Fortifying a Global Supply Chain (Part 1), which was discussing the steps that Toyota was taking to insulate its supply chain against future risks from supply disruptions. I thought I would share some of their strategic supply chain initiatives to see what people think. The three main steps Toyota plans to undertake can be summarized as follows:

1)      “…further standardize parts across Japanese automakers so they could share common components that could be manufactured in several locations"

2)      “…ask suppliers further down the chain to hold enough inventory – perhaps a few months’ worth – for specialized components that cannot be built in more than one location”

3)      “…make each region more independent in its parts procurement so that a disaster in Japan would not affect production overseas”

– Standardizing of parts will definitely reduce the risk and reliance on single sourced components. This practice is commonly employed in the electronics industry. However, undertaking this initiative will clearly require more effort as a result of additional engineering efforts to standardize these parts. Given Toyota’s strong reputation in the area of quality (likely somewhat as a result of unique and arguably better design), will corners have to be cut or sacrifices have to be made in the name of standardization? What will the longer term impact be on the brand image should this happen? Remember the Sticky Gas Pedal recall that Toyota went through in 2009-2010? Step 2 – Asking suppliers further down the supply chain to maintain higher levels of inventory can surely provide an insulating layer against both volatility in demand and short term supply disruptions, however the question is….what is the cost of this and who bears that cost? Traditionally in the automotive industry, larger OEMs and Tier 1 suppliers have a reputation of pushing the cost burden downstream to lower tier suppliers by such methods as imposing penalties for stock outs (line down situations) and applying cost negotiation pressures. Another recent article by Bob Ferrari points to a new study which while referring to these types of behaviors, also refers to a trend of automotive supply chains working to become more collaborative, which in my opinion, is what is needed in times where everyone is being squeezed. Having said that, this article also references the practice in this industry to be very focused on the short term pains, rather than longer term gains that can be realized through investment in technology solutions to enable better collaboration. These seem to conflict with each other. So what is the reality? Truth is that it’s probably a bit of both. I can speak to the fact that I personally know some companies in the automotive industry that are “getting it” and being more collaborative with their extended supply chain, however, I am sure there are many that are still stuck in the past. Step 3 – Independent parts procurement – This reduces regional risk in manufacturing sourcing however increases the risk of inconsistent quality and reduces ability to leverage overall purchasing power when negotiating supply contracts. Industry trends in supply chain (especially in high tech) are leaning towards more and more companies looking to a centralized procurement strategy that leverages the volume of business they do with suppliers globally to negotiate more favorable procurement terms. This is even true of companies which outsource portions or all of their manufacturing to companies in the EMS industry. This strategy that Toyota seems to be employing is actually the opposite of this trend. So what is the “right” answer? Good question! While I agree that all the steps that Toyota has outlined will assist in reducing some areas of supply chain risk, the biggest risk I still see is that all these strategies seem to come at a cost which doesn’t have some sort of ROI specifically tied to it….as would be the case with an investment in technology.  So…..what do you think? Is this the right strategy or will this just drive up the cost of the next car you buy? What would you do?