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Originally published March 16, 2011 at 6:24 PM | Page modified March 17, 2011 at 12:47 PM

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Japan crisis a threat to companies' supply routes

The disaster in Japan has exposed a problem with how multinational companies do business: The system they use to keep supplies rolling in is lean and cost-effective — yet vulnerable to sudden shocks.

Information from Seattle Times archives is included in this report

The disaster in Japan has exposed a problem with how multinational companies do business: The system they use to keep supplies rolling in is lean and cost-effective — yet vulnerable to sudden shocks.

Factories, ports, roads, railways and airports in northern Japan have been shut down or damaged because of the stricken nuclear plant in the region. So auto and technology companies are cut off from suppliers in the disaster zone. Some have had to stop or slow production.

"When you're running incredibly lean and you're going global, you become very vulnerable to supply disruptions," says Stanley Fawcett, a professor of global-supply-chain management at Brigham Young University.

The risks are higher because so many companies keep their inventories low to save money. They can't sustain production for long without new supplies.

Boeing spokesman Thomas Brabant said Wednesday there has been no immediate impact on Boeing production from last week's earthquake and tsunami. Its Japanese suppliers are still shipping some of its airplane parts, and it has several weeks' worth of parts in its inventory.

More than one-third of the parts for Boeing's new 787 are made in Japan, and 20 percent of parts for the 777 are made there.

Subaru has suspended overtime at its only North American plant, in Lafayette, Ind. Toyota has canceled overtime and Saturday production at its 13 North American plants. The two companies are trying to conserve their existing supplies.

Among the auto plants damaged by the quake was one in Miyagi prefecture that supplies parts for hybrid batteries in Toyota Prius, Camry and Lexus hybrids. It's unclear when the plant, a joint venture of Toyota and Panasonic, will start running again.

Even companies whose Japanese suppliers escaped damage have scrambled to ensure supply lines remain intact. Ford, for example, relies on a Japanese plant for hybrid batteries for its Fusion, Escape and MKZ hybrid vehicles. That plant wasn't damaged in the quake. But Ford isn't taking any chances because of the transportation troubles in Japan. It's looking for alternate supplies and considering airlifting parts if shipping shuts down.

"The whole thing could change overnight," says spokesman Todd Nissen.

"You can't build a car if just 98 percent of the parts are available," says Fred Hubacker, executive director of auto-restructuring firm Conway MacKenzie in Detroit. "Many of these parts are highly technical products that are not easily replicated."

For consumer electronics, supply chains are complex. Some cellphones have dozens of chips. Apple's iPad requires parts from around the world. The insides of the device show how much coordination Apple must have with suppliers around the world to ensure there are enough parts.

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The Wi-Fi version of the iPad uses a Toshiba chip to help store data, according to analysis by iFixit.com. The chips that control communications come from Broadcom in Irvine, Calif. Memory comes from Samsung Electronics in Korea. Texas Instruments in Dallas makes a chip used for the touch screen. The processor is designed by Apple, based in Cupertino, Calif.

Those are just the main semiconductor guts of the machine. A host of other chips, made by other companies, do other things in the iPad: powering the compass, for instance, and sensing when light hits the screen. All the other iPad parts, from the touch-screen glass to the screws and cameras, come from a variety of suppliers.

Toshiba was one of the companies forced to shut factories after the quake. So it's possible that the supply of chips for Apple could be disrupted and delay iPad shipments.

Apple on Wednesday postponed the release of its iPad 2 tablet computer in Japan as the country grapples with the tsunami's devastation. The device had been set to go on sale March 25.

Over the past two decades, multinational companies have built and tightly managed supply chains that span the globe. These chains link low-wage factories in places like China with operations in Europe, Japan and the United States. The emphasis, BYU's Fawcett says, is on being "lean and global."

Companies have kept inventories at a bare minimum to cut costs. Many have relied on what's called "just-in-time" management to quickly match supplies with sales.

But that increased efficiency has carried a risk: The lean, far-flung supply chains left multinationals vulnerable to supply shocks. And the shocks have come one after another.

The September 2001 attacks in the United States froze global transportation. The 2003 SARS outbreak shut down production in southern China. The eruption of a volcano last year in Iceland stopped air traffic over Europe. And now a disaster is unfolding in Japan.

Fawcett says companies are starting to rethink the wisdom of depending entirely on supply chains that must cross oceans. In the mid-2000s, he says, some U.S. companies started moving factories from China to Mexico. There, they could still take advantage of cheap labor without having to contend with ocean crossings.

He says he suspects the trend — called "near-sourcing" — will become more popular after the disaster in Japan.

Boeing executives have discussed a so-called "supersite," a cluster of assembly and supplier operations — for a potential successor to the 737 that could eventually be produced at rates up to 60 planes a month. But their rationale centers on the day-to-day logistical difficulties of shipping large quantities of huge airplane sections, not the fear of transport interruptions.

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