According to David Simchi-Levi, Professor of Engineering Systems at MIT Sloan, “a growing number of U.S. executives are moving some production operations back from overseas.” While there are a great number of factors driving that trend, one is the need for supply chain flexibility. Today’s global supply chain presents a significant amount of risk, mostly due to the combination of geographically diverse supply chains and Just-in-time (JIT) manufacturing that results in low inventory levels.
Let’s take a look at one case study on supply chain flexibility in procurement that Simchi-Levi presents in some programs on supply chains. In 1997, Aisin Seiki was the sole supplier of 98% of the brake fluid proportioning valves (called P-valves) used by Toyota Japan. These valves are vital, and if supply is interrupted, a production line must stop.
Several years ago, a fire broke out in Aisin’s main factory. The initial estimate was it would take two weeks to restart production and six months for complete recovery. This might not seem like a lot of time, but at the point of the fire, the plants were operating at full capacity and Toyota had strong demand in the market.
Unfortunately, as dictated by JIT manufacturing, Toyota only kept two-to-three days of parts in stock. Each day the production line was not operational would result in huge losses in sales. But here’s where supply chain flexibility helped: Toyota started a recovery effort that included many of its suppliers. The company even restructured its supply chain for the brake fluid proportioning valve. It distributed the blue prints for the parts to many of its suppliers and modified existing machinery as needed. It even purchased new machinery on the spot market. This collaboration involved 200 of Toyota’s suppliers.
According to MIT Sloan Management Review,“within days, firms with little experience with P-valves were manufacturing and delivering parts to Aisin, where they were assembled and inspected before shipment to Toyota.”
Simchi-Levi poses some questions about this approach:
- Since the P-valve is a critical component, does single sourcing make sense in this case?
- Since the P-valve is not expensive, why only carry limited inventory?
- The JIT capabilities of Toyota and its partners forced those partners to deal with the challenge.
The unforeseen happens regularly. And, it means manufacturers need to have a deep understanding of their supply chains, and the inherent risks in them. They then must assess how much flexibility they need in their supply chains and how much they actually have. The delta of that, of course, is where the hard work begins.