How to quake proof a supply chain

September 7, 2011

After a long hiatus, we return with a post. This one on Toyota’s plan to quake proof its supply chain over the next five years. (Baltimore Sun, 9/6/11). ¬†They have three ideas:

a) standardize parts across suppliers

b) hold more inventory of critical parts

c) each region should become independent in its parts procurement.

All three will indeed make the supply chain more earthquake proof. The first allows the company to switch production to non-affected suppliers. The second allows them to draw down the reserve of parts. This does rely on the transportation network recovering relatively quickly. And hopefully the inventory is stored in a quake proof facility – imagine you produce a six month supply of microchips only to have the roof cave in and crush them all (or they melt in the subsequent fire). The third will help too (create independent regions) but it may be overkill. If a part is manufactured in a low-quake risk zone, and it is a specialized part that should most cost effectively be produced in a single facility, then why insist that it be made in 5-6 plants? This initiative may have more to do with managing exchange rate risk.

So, these are surely worthwhile initiatives and they apply beyond automobile production. The real challenge will be the implementation details – how will the company decide between part A that costs 5% more but is standard and can be produced in a number of facilities and part B that costs less but is specialized and made by only one supplier in an earthquake prone area? There could be some interesting research done on this challenge.