Fragile auto supply chains

Following last year’s Japanese earthquake and tsunami, there were many articles on how these disasters exposed the fragile nature of modern supply chains. (We have one or two – ok at least three – posts on this as well.) Now there are similar stories appearing about a somewhat less dramatic event that is none the less causing headaches for automakers. An explosion at a German chemical plant is creating an extreme shortage of a resin used in a nylon used in many kinds of auto parts. Here is how the AP explained it (Crises make automakers rethink lean parts supplies, Apr 20, available at Yahoo! News and other places).

One factory now putting automakers at risk is the German chemical plant damaged by last month’s explosion. The plant made at least one-fourth of the world’s PA-12, a nylon component in plastic fuel lines. It also supplied 70 percent of the world’s CDT, a chemical used by other companies that make PA-12, according to UBS analysts.
PA-12, also known as nylon 12, is crucial because it helps the tubes resist deterioration from carrying fuel. It’s also used in seats, and in pipelines and consumer products. No automaker has reported any factories running short of tubes, but industry analysts say that could come within weeks if alternatives aren’t found and tested quickly.

As the AP headline suggests, some are calling into question whether this means having lean inventories is not worth the risk. To my mind, this is missing the point. The real risk here is not tied to inventory per se but to how items are sourced. Ford might be buying brake hoses from multiple suppliers but did they realize that all of their suppliers were dependent on one firm for a critical component? This would not be as big a deal if there were a dozen other suppliers in the market and the plant in question produced only, say, 5% of world output.

If anything, this suggests that inventory levels should be tied to the ease of replacing the supplier. That, in turn, says something about economies of scale. There have got to be economies of scale in making this resin and that says the whomever grabs a large market share is going to enjoy a cost advantage that will make it very hard for other firms to compete.

One last point on this story. An alternative for firms caught in this bind is to look for alternative sources. That could be other factories making the same thing or other materials that could replace the nylon in short supply. Apparently, many firms are going this second route (Search Begins for New Resin, Apr 18, Wall Street Journal).