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Tsunamis and Supply Chains: The Perils of Global Manufacturing

They both arrived on the same day. The AP press release, "Manufacturing flat in June because of weak autos," landed in my email in-box a few hours before the book, "Make It in America," was delivered to my mail box, courtesy of and the US Postal Service.

Synchronicity? Perhaps. Coincidence? More than likely.

But still there are some interesting parallels between the two. The AP story reports that production at US auto factories slumped in April and May and declined again in June by 2.0 percent due to supply chain problems brought on by the horrendous earthquake and tsunami in Japan.

Japan is the second largest exporter of automobile component parts behind Germany, and auto manufacturers in the US and around the globe rely on Japan for component parts. Many of the country's component manufacturing plants are located in the area around the quake. As a consequence, Japan's much-touted "just in time" supply chain process was severely disrupted.

Now at first glance it appears that the US auto companies took a major productivity hit because of their reliance on an extended supply chain over which they had no control. The Japanese parts companies are like an essential appendage upon which you have a dependent, symbiotic relationship — damage the appendage and you're in trouble.

But according to the CNW Group in Canada in an article published shortly after the earthquake, "The United States is the world's largest auto parts importer at more US$43 bn annually, including US$7.6 bn from Japan, creating significant risk of parts shortages. However, roughly 80 per cent of all auto parts used in assembling new vehicles in the United States and Canada are produced in North America — the United States, Canada or Mexico. Japanese-made parts now account for only about a six per cent share of all auto parts purchased in Canada and the United States. In addition, their share of overall auto parts imported into the United States has fallen to 14 per cent — half of the level prevailing in the mid-1990s."

Even so, the Japanese quake created a significant-enough break in the automotive supply chain to adversely impact production. Offshoring has its dark side.

The book Made in America discusses offshoring in some detail. The author is Andrew Liveris, chairman and CEO of the Dow Chemical Company and co-chair of President Obama's Advanced Manufacturing Partnership.

I just started the book and so far, it's a good read. Liveris states his case clearly and with passion.

In Chapter 3, "Fighting Offshoring," he talks about why so many American companies are moving their business overseas. Says Liveris, "Thousands of...companies, large and small, old and new, are finding the business environment in the United States unsupportive at best, suffocating at worst. They face financial realities that, in time, force many of them out of the country, even when they wish to remain."

There are many reasons for and consequences of this seemingly unstoppable trend, and one of them is the creation of complex, extended, globalized supply chains with all of their advantages and disadvantages.

When the Tōhoku earthquake and tsunami devastated Japan on March 11, the disadvantages became abundantly clear.

Posted by John Kirkley - July 26, 2011 @ 2:14 PM, Pacific Daylight Time

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