Global Components Shortage - Time for Companies to Become Competitive

As in the previous article 40 Trillion Yen Loss from Broken Global Supply Network – the Japan Disaster as much as 40 trillion yen loss is estimated to occur due to broken global supply chain of critical components of automotive and electronics, attributing to the Japan disaster and its aftermath. Negative effects on business and economy from the broken links have been one of the hottest topics about the disaster, both English and Japanese sources, such as the fact that Toyota has been halting operation in its plants in Japan and cascading that it may affect operation in their dealers in the U.S.




On the other hand, there was an online Japanese article that insists that this critical situation of shortage of electronics components can be converted to an opportunity to strengthen the nature of companies to become competitive.



The author would like to first briefly explain why the broken global link occurred then introduce the essence of the article published on April 14, written by a Japanese management consultant, Kishira, Yuji.



1. What is the reason for severe shortage of critical electronics components due to broken global supply chain?



According to Nikkei, Japan’s leading newspaper specialized in business and economy reported on 9th April, it is ironically the management innovation of Japanese electronics components suppliers.



With “kaizen” spirit, many of the Japanese components suppliers, although they might be small in size, radically improved productivity while boosting quality to become extremely competitive globally. Such companies became (almost) “the only one” supplier in their respective business domain, with worldwide market share of 70% or more in some cases. Also such companies integrated their plants in pursuit of efficiency and productivity to plants in Tohoku (the hard hit region from the disaster).



And, with the disaster that made such plants to operate for weeks and/or broke physical distribution network because roads are piled with wreckage and requires clearance etc., the global supply chain of critical electronics components collapsed, affective automotives and high-tech industries in particular.



As Kishira points out, finished products cannot be made even if one single component out of hundreds and thousands of components lacks. Thus, worldwide finished product makers and trading companies supporting them are making upmost efforts to assure components, when finished makers had been minimizing inventory of components with long year cost reduction and just-in-time efforts and thus have no additional inventories.



2. How can this critical situation of component shortage be converted into an opportunity to become competitive?






1) Check inventory of finished products recorded in financial statement



Kishira agrees that inventory of components are likely to be drying up but insists that inventory of finished products needs to be checked and if it is equivalent to 2 months supply to the market it means in average supply of 2 months is secured.



In addition, there should be inventories of finished products in whole sellers and retailers, meaning that it is quite possible that there are more inventories of finished products than recorded in financial statement.



This means that although it is of extreme view, while the inventories of finished products are available, it is possible that the actual loss turns out to be smaller even if the production stops. And, if inventories are cleared out without drop in sales during period, it is possible that the profitability of the company improves drastically.



2) Focus resources (including components) only on selling well products from end-to-end total optimization perspective



Of course there can be many types of inventories, such as those of selling well products with very little inventories from those of slow moving products with too much inventory because few consumers buy. Products with much inventory will not be produced, and this means components of such products will become overabundant.



Although finished products are different, there are many cases in which same components are used. If that would be the case, the overabundant components can be used to product selling well products.



This approach is of utilizing components exclusively to selling well products with scarce inventories, meaning providing only products that consumers buy. This would also mean gradual decrease in inventory of slow moving products. This really is about focusing resources on what the market really needs.



With 2 months inventory, the products made from how will in average reach market 2 months from now. When critical components are insufficient finished product makers cannot afford to produce products that “might” be necessary in 2 months time. Many of production touch time (time actually required to manufacture products) are constituted by processes in (ten) minutes. It is not necessarily required to have 2 months inventory if products can be manufactured in such a time.



The minimum inventory required is total of manufacturing time, lead time to restock including transportation time and estimated maximum number of products to be sold at the peak. Production planning can be made and implemented with minimum inventory plus trend in demand.



This approach requires sharing such information with component suppliers as well, to maximize efficiency of limited capacity to make and provide finished products to market from end-to-end (component suppliers to retailers) total optimization perspective.



If this approach is taken appropriately it would mean optimization of constituents of finished product inventory, leading consequently to improvement in profitability.



3) Make the operation of new approach permanent



Many companies may well be executing operation mentioned above to some degree and it is in crisis that many companies come up with great discovery and implement thoroughly operation of new approach.



However, many companies go back to their old operation when the crisis passes by. That is what should be avoided. Companies need to embed the new productive approach in everyday operation to make it permanent. This would lead to sustainable growth of the company.



If there is a few months inventory recorded in financial statement, regard that few months as transition period to switching to the operation of the new approach and establish a system to make that operation sustainable. Then the company will be able to transform to a productive operation and process system with minimum inventory of optimum constituents, a requirement for high performing and sustainable company.



3. The author’s final thoughts



What Kishira says reminds the author of the objective and concept of Change Management based on the book “Leading Change” by Professor John P. Kotter of Harvard.



This is of 8 steps in managing change, change in processes, systems, and how people do everyday business. This requires cultural change, as mentioned in step 8, in which the new way of doing everyday business is “embedded” in the organization. In many cases, such change management starts with some kind of “trigger” that creates sense of urgency as mentioned in step 1. Sense of urgency usually comes from some kind of crisis.



To the author, what Kishira want to say is to take this opportunity to make and manage change to make the company competitive, and that is what the author would like to advocate, taking this opportunity.



This is to start with creating sense of sense of urgency under the current crisis (shortage of critical components attributing to the broken global supply chain), to change processes, systems, operation and how companies engage in everyday business. And the companies need to make sure to complete until the last step so that the operation with the new approach is becomes a part of their DNA and they would not go back to old way of doing business/operation.





References:-

Kishira, Yuji (April 14, 2011) Electronics Component Shortage is Serious – But No Need to Worry. Now is the Time for Companies to Become Competitive. This is Why

http://diamond.jp/articles/-/11893