For the first time in more than 20 years, U.S. automakers are questioning a pillar of manufacturing: The practice of bringing parts to assembly lines right before they're used.
So called just-in-time deliveries have helped automakers save billions and run their factories more efficiently. But the approach also relies on an almost perfect supply chain. And twice in the last year, the system's weak links have been exposed.
An earthquake last March knocked out many Japanese parts makers, resulting in factory shutdowns and model shortages around the world. And last month, an explosion at a German chemical plant cut off supplies of a resin essential in car fuel lines. Without those parts, assembly lines could slow or grind to a halt within weeks, causing shortages of cars on dealer lots later this year.
The threat of a new shortage comes as U.S. auto sales are just becoming healthy again. Carmakers are scrambling to find alternatives to the resin.
Supply problems are unavoidable, but car manufacturers are starting to rethink the just-in-time system, which is more global than ever and relies on increasingly specialized parts from fewer suppliers.
The system, developed by Toyota in the 1970s and brought to the U.S. in the 1980s, discourages big stockpiles of parts in favor of deliveries shortly before they're needed. It saves companies the cost of storing the parts or carrying them on their books. A typical large supplier now has only a few weeks' worth of parts, says Steven Wybo, a managing director and automotive expert at Conway Mackenzie, a consulting firm.
"It's pretty fragile," Wybo says of the system. "The only way to protect supply is to build up inventory. Until that happens, we're going to continue to see problems like this."
Many of a car's 3,000 parts have become so specialized that they're made only by a few factories worldwide. That leaves the industry vulnerable to fires, natural disasters or other problems that may knock out a single parts factory.
The answer may be to stock up on parts that come from one factory, says David Cole, chairman emeritus of the Center for Automotive Research, an industry think tank and research group.
"You can never take away risk completely," he says. "You want to minimize it."
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.
The results could be even more serious than last year's Japanese earthquake, which damaged parts factories and cut off everything from electronics to rubber components to a shiny pigment for paint. The shortages mainly affected factories run by Honda Motor Co. and Toyota Motor Corp., costing production of 400,000 cars and trucks in North America. The companies have since made up that volume, but it took nearly a year for the supply of cars to return to normal.
The industry used to be on firmer footing. Twenty years ago, companies relied less on suppliers and made more of their own parts. But General Motors Co. and Ford Motor Co. spun off their parts businesses in 1999 and 2000, a move that saved money but gave them less control over inventory.
"Just in time is really risky, but it's better for cost-effectiveness," says Wybo.
And it works well for parts such as bolts and fasteners because many companies make them and there are backups at the ready if the main source is knocked out.
Other trends are magnifying the risk of the just-in-time approach. Parts supply companies downsized significantly during the recession, and the remaining firms don't have the money or staff to stock up on raw materials in case of a disruption. The industry also shrank because carmakers needed increasingly specialized parts to meet government safety and fuel economy standards. Suppliers without those products went out of business.
In the U.S. alone, at least 57 parts makers have closed, were bought out or went into bankruptcy since 2008, according to the Original Equipment Suppliers Association.
"That has condensed the number of players in some instances," says Michael Robinet, managing director of IHS Automotive Consulting.
Robinet warns that there are many potential shortages throughout the industry beyond PA-12. There are relatively few suppliers of specialty metals such as boron, which is added to steel to make it stronger and lighter.
"There's not a lot of extra capacity," he says.