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OM in the News: Increased Efficiency From JIT Comes at a Price

March 8, 2011

Just as the recovery in US auto sales begins to accelerate, a fire last week at Magna International, a major auto parts manufacturer near Detroit, put a huge scare into  five automakers. Two of them, GM and Mazda, had to close plants and stop making some models. Three others, Ford, Chrysler, and Nissan,  faced the prospect of having to do without critical parts from their only supplier of ceilings, consoles, and other parts.

Yesterday’s Portland Press Herald (March 7,2011) writes: “The impact of the blaze shows how years of work to make auto plants more efficient can fall apart when something interrupts the flow of parts in an intricate supply chain”.  As we discuss in Chapter 16, JIT has proven a wonderful system for 3 decades in the auto industry. Auto companies have cut costs and become more efficient by going to a JIT parts delivery system to avoid paying for huge stockpiles of parts.

But to avoid buying costly machinery, parts firms often make a particular part at only one site. As a result, plants have few parts in storage and are so dependent on every link in the supply chain that the whole system falls apart, as it did in this case, if production is interrupted at a single factory. These days most auto parts are “single-sourced”.

The story for Magna and its customers fortunately (and luckily) had a happy ending today. The company was able to work with its customers to get enough of the equipment up and running to allow auto plants to receive  at least a portion of their needed parts. Our Ch.16 case study, “JIT After a Catastrophe” deals with how Caterpillar faced a very similar disaster when a tornado destroyed its Mississippi couplings plant in 2008.

Discussion questions:

1. How should the auto makers react at this point?

2. What should Magna do in planning for the future?

2 Comments leave one →
  1. March 12, 2011 12:41 am

    Barry, you made a very timely post just three days before the disasterous earthquake in Japan. Damage reports are still coming in, so we won’t know which businesses are affected for awhile, but tragic events like this underscore the importance of balancing the efficiencies of JIT operations with the safety of risk management. For example, it may not be enough to have a dual sourcing strategy if both sources are located near each other. Having sources in different countries might not only help hedge against exchange rate volatility, but it could also help offset the risks of natural disasters like the one that we’ve just witnessed in Japan.

  2. March 12, 2011 1:31 am

    Chuck, Excellent observation. We will all watch very closely how the damage impacts Japanese production this year. I suspect that because it is such a robust economy, things will be up and running much faster than they would have in most other nations.

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