It's not always that you feel sorry for Japanese automotive behemoth Toyota, but I'm sure we should all wish it well at the moment. For several years now, the Japanese have been the world's "lean manufacturing" innovators as exemplified by the likes of the Toyota Production System. During conventional times--therein lies the rub, but more on that later--they have sought to minimize muda or waste, which comes in seven forms: (1) overproduction, (2) overprocessing, (3) unnecessary transportation, (4) excess inventory, (5) excess motion of workers and equipment, (6) product defects, and (7) downtime. Certainly, we can all do without excess pollution, busywork, and material use. These are goals we can applaud.However, these are obviously not conventional times in Japan as many supply disruptions occur: lack of electricity, water, transportation, and what else have you. Add in the human element of fear given what has occurred on top of the possibility of harmful radiation spreading. Given the highly interconnected production chains in Factory Asia (to use cheaper labour where available, inter alia), it may thus be detrimental that Japanese manufacturing has become too lean. Given that several Japanese wares are at the top of the production value-added pyramid, a lot of processing and other less knowledge-intensive activities elsewhere will have to wait while our Japanese friends get back to speed at doing what they do best. In the meantime, however, disruptions are noticeable. Be prepared for shortages of all sorts of manufactured goods in the near future, then. From Reuters:
Automakers, shipbuilders and technology companies worldwide scrambled for supplies after the disaster in Japan shut down factories there and disrupted the global manufacturing chain. Technology companies were particularly hit since Japan accounts for one-fifth of the world's semiconductor production, including about 40 percent of flash memory chips used in everything from smartphones, tablets to computers.As an illustration of a clear supply chain jam, many Korean firms have been left in the lurch:
Multinationals that buy parts from Japan or have plants located there were grappling with power blackouts, factory closures and transportation problems after roads, railways and ports in north east Japan were destroyed by Friday's devastating earthquake and tsunami.
Toyota Corp was hard hit as many of its plants were near the epicenter of the 8.9 earthquake, and Sony Corp has suspended production. Texas Instruments warned its two suspended plants would take until July to return to full production, though it had managed to re-direct 60 percent of their output to other sites. Of the two, its Miho facility churns out about 10 percent of its analog chips by revenue.
Intel Corp was managing better. It buys wafers from Japan but relies on flights to transport goods. "Right now the main issue is trying to sort through the issues associated with moving materials within Japan," Intel spokesman Chuck Mulloy told Reuters. ON Semiconductor said unreliable power supplies kept one its six factories off line.
These disruptions pushed shares down worldwide in the industry. The Thomson Reuters G7 Semiconductor & Semiconductor Equipment Industry Group Domestic Float Price Return Index was off 1.1 percent late on Monday. Rolling power blackouts are set to hit Tokyo and surrounding areas over coming weeks, adding to the challenge of inspecting and repairing northern Japan manufacturing plants. Aftershocks and radiation leaks from damaged nuclear power plants also threaten production in the region.
Companies and analysts said it was too early to gauge how long the problems would last. Power supply is critical, as is transport. Ports handling as much as 7 percent of Japan's industrial output sustained major damage from the quake, with most seen out of operation for months.
Toyota plans to halt production at all its 12 Japanese plants in Japan through Wednesday to support relief efforts, slashing output by 40,000 vehicles. "Not only is the struck region one of our production bases, those directly hit and vastly affected include our dealers, suppliers and numerous other partners," Toyota President Akio Toyoda said in a statement on Monday.
Honda Motor Co said it would suspend production at its Japanese plants at least until March 20, and it was closely monitoring the supply of parts to its southern England plant in Swindon..."I'm looking at it as mostly a temporary issue for the industry," Standard & Poor's Efraim Levy said. "The question that no one can answer is what the duration will ultimately be...It seems to be the automakers' plants themselves are in OK condition, but some suppliers have issues that stop production of a whole vehicle line of a certain car or a certain truck."
Others warned the long-term impact may be more severe than anticipated. Dave Andrea, economist with the Original Equipment Suppliers Association, said the earthquake could have the largest impact on the global auto industry since World War II. Unlike now, past disasters had not hit as many segments of the infrastructure -- rails and roads to plants and electricity -- of a country with major auto manufacturing. "This is going to have an impact on every vehicle manufacturer and every supplier," he said.
South Korean companies, which depend heavily on Japan for LCD glass, chip equipment, silicon wafers and other materials to make semiconductors, are likely some of the worst hit. Hynix Semiconductor, the world's No.2 memory chipmaker and a rival of Japan's quake-affected Toshiba Corp and Elpida Memory, said it was concerned the quake may weaken consumer demand and disrupt supplies.While I understand the win-win of higher profitability and lower waste of just-in-time manufacturing, the flip side occurs in times like these. Given that there is so little margin for error in supplying critical materials and components abroad, a major event in a key nation like Japan jams many of those lying downstream.
"It could give a boost to battered chip prices but that's a short-term impact from disrupted supplies," said Hynix CFO Kim Min-chul. "We are more concerned about the quake reducing overall consumer demand and disrupting supplies of chip components and equipment, which could interrupt our production as well."
Toshiba, which supplies more than a third of the NAND memory used worldwide in devices such as Apple's iPad, was restarting a chip factory in Iwate, northern Japan. The disaster also led to a rise in spot prices in China for DRAM chips, mostly used in personal computers, said chip price tracker DRAMeXchange. Nokia, said it was investigating supplies. About 12 percent of its components are sourced in yen, but Japanese components are likely to represent a larger share due to a recent renegotiation of supply contracts.
Japanese steelmakers halted production at some plants, a possible problem for South Korean shipbuilders since Japan exports 40 percent of its steel. South Korea has the world's top three shipbuilders -- Hyundai Heavy Industries, Daewoo Shipbuilding and Marine and Samsung Heavy Industries
If you're a follower of organization science, Factory Asia with lean manufacturing Japan at its head is a tightly coupled system where slight changes have widespread systemic consequences. There is often very little slack or room to accommodate, sorry for the term, slippages in the process. While redundancies can indeed be muda or waste, they may also serve as buffers to shocks administered during extraordinary situations. A system that relies so much on the right things being at the right place at the right time for the right folks to work on them is not resilient when the work flow is upset. Why did the stocks of several global manufacturers drop in recent days? Either their supply chains rely significantly on Made in Japan stuff--or at least certain folks think they are.
BTW: An incident which I recall had fairly marked knock-on effects was the 1999 Taiwan earthquake. Prices of computer memory (DRAM) of which it was a major manufacturer went up quite drastically in a matter of days after it occurred.
