When a major fire broke out at a Magna International (NYSE:MGA) auto parts plant in Michigan last week, General Motors (NYSE:GM) and Mazda wound up getting burned. The two auto manufacturers were forced to close down plants temporarily, suspend assembly of certain models and cut shifts when they ran out of ceilings and dashboards produced by Magna for certain vehicle models.
Fortunately for Magna, no employees were injured in the blaze and the company was able to restart half of its operations by Monday. GM, which had to suspend vehicle production at six of its plants because it ran out of interior parts, started to bounce back on Tuesday.
The parts shortage also shut down the Flat Rock, Mich. AutoAlliance plant – a global joint venture of Mazda and Ford (NYSE:F). That factory’s production of the Mustang is not expected to resume until Friday; and no information is available as to when Mazda6 production will resume at the plant.
The disruption to vehicle production could have been much worse. Magna is not only Canada’s largest auto parts manufacturer; it’s also a strategic supplier to Chrysler, Nissan and Ford. Had the company’s production stayed off-line much longer, the parts shortage and assembly line disruptions would have spread beyond GM and Mazda to the other manufacturers.
It’s been a rough go of late for automaker stocks, which had fallen about 20% from late January before a push higher Tuesday got the sector off the floor.
Ironically, the weak link in the automotive supply chain might well be the same strategy that helped the industry regain its balance in the late 1980s: just-in-time (JIT) manufacturing. In an effort to reduce costs and boost efficiency in their manufacturing operations, all automakers have adopted leaner inventories and tighter coordination and collaboration with suppliers.
Instead of investing in (and warehousing) excess inventory, vehicle manufacturers are ordering parts as needed. Over the past two decades, these practices have reduced the cost of excess inventory, boosted operational efficiency and better equipped them to compete in global markets. But despite its success to date, here are three reasons why JIT may not be the best strategy for the current competitive climate:
Supplier Problems Cause Production Delays. Unforeseen events that impact key suppliers can bring automakers’ assembly lines to a screeching halt. The Magna fire is one example; another is inclement weather. Over the past four months alone, winter storms wreaked enough havoc with the automotive supply chain to cause more than 30 U.S. auto factories to close temporarily because of parts shortages.
Delivery Disruptions Are Costly. Because many parts suppliers and auto manufacturing plants are located in the Midwest, their operations were disproportionately hurt by bad weather such as blizzards and ice storms. If manufacturers are running on lean parts inventories, short-term transportation disruptions can have a major impact on their ability to keep plants open, employees at work and vehicles rolling smoothly off the assembly line.
High-Priced Oil May Be Shifting The JIT Value Proposition. The value proposition behind just-in-time manufacturing was to reduce costs and boost efficiency by eliminating excess inventory. Having less money invested in all those parts in the warehouse makes sense when fuel prices are low and manufacturers are able to tightly coordinate parts replenishment with orders. But with skyrocketing oil prices, these savings increasingly are being offset by the higher cost of fewer parts delivered much more often.
As the auto industry continues to shake off the hangover of a global recession, any unplanned interruption in production can cause a big hit on the bottom line. For automakers that have spent more than 20 years pushing inventory risk to their suppliers, the cost-effective play today may be to increase today’s parts inventory to better protect tomorrow’s production.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.
