Supply chain disruption

As companies strategise to counter the fall-out of COVID-19, our focus is on the automotive industry and our money is on Toyota. Post-pandemic recovery of this consumption-driven sector involves adapting to changed consumer attitudes and priorities, and meeting the blessing-and-curse challenge of higher demand.

Supply chain bottlenecks have been bothering the automotive industry for more than a century. It was Henry Ford who first tackled the issue, introducing the Just-In-Time approach in the early 1900s. The revolutionary supply management system increased efficiency and cut costs by anticipating the crucial materials required for fulfilling orders and receiving them just prior to assembly. The practice is still commonplace, but under review after the disruptions of the pandemic.

Today’s version of the challenge echoes the same issues. A global shortage of semi-conductors and battery-related materials is forcing a major U-turn in the inventory management of car manufacturers. The shortage is expected to persist for several years, requiring the automotive sector supply chain to get creative in its solutions.

Battery makers are ahead of the game, with some having already taken necessary steps to reduce the risk of being short of critical materials. Elon Musk’s Tesla is currently reviewing the materials required for production, with the objective of acquiring them in the most vertical way by reducing intermediaries. The company recently signed an exclusive agreement with Piedmont Lithium, a fully-integrated lithium company, to safeguard its reserve of lithium in the manufacturing of its batteries.

The strategic decision to reduce reliance on the Just-In-Time approach by adding inventory buffers is influenced by an even more dominant factor. A global chip shortage is expected to last beyond 2021 according to most analysts, contributed to by the production surge of electronics, tech products and the automotive industry.

The car industry’s continued shift to electrification and autonomous driving indicates the resource will increase in relevance, and car manufacturers will have to adopt new inventory management approaches to secure their future.

Auto-giant Toyota is well positioned to overtake its competitors after announcing it doesn’t expect to be impacted by the chip shortage after stockpiling critical components from March 2011 following the tsunami and earthquake disasters in Japan. The contingency of the company to reduce reliance on the Just-In-Time manufacturing strategy earlier than its foreign rivals is likely to pay off, particularly in terms of hybrid manufacturing, as hybrid and plug-in tech is expected to remain high through 2030.

Toyota’s bright outlook is underpinned by a strategy for success. The company is well positioned to ride out the shortage environment and associated bottlenecks that continue to set back competitors. A solid R&D portfolio further bolsters the Nippon early mover’s lead, with fuel-cell electrified vehicles (FCEVs) powered by hydrogen presenting an opportunity for cut-through in an innovative and ruthless environment.

The shortage of semi-conductors should benefit the automotive industry overall, as higher demand and lower supply provides car manufacturers with improved margins onwards. Backing the most seasoned automaker in difficult environments is a highly recommended move.