Manufacturers consider changes to just in time production model amid disruptions
By Christopher Reynolds (CP)Business Operations Manufacturing chips manufacturing production production model semiconductor semiconductor chips supply chain
MONTREAL (CP) – For much of the past 21 months, Rami Aroosi has struggled to procure enough bikes to fill the racks of his downtown Ottawa cycle shop.
Shipping rates have skyrocketed amid a backed-up global supply chain caused by the COVID-19 pandemic, pushing up prices. And the absence of just one part in a vast manufacturing network that originates in Asia can put the brakes on entire shipments.
“For example, Shimano – almost every second bike on the planet has Shimano parts,” says Aroosi, who has run Foster’s Sports Centre for three decades. “The companies manage to get the frames, but they cannot get the parts to assemble it.
“It’s like a chain: One thing triggers another and makes it really worse.”
Aroosi is among thousands of retailers across the country whose sparsely filled stockrooms have run short of products ranging from electronics to lumber and liquor.
The shortages and price hikes highlight the vulnerabilities of a just-in-time delivery model, prompting stakeholders and experts to rethink the fine-tuned approach with an eye to early warning systems, reshoring and infrastructure upgrades.
Originating in the automotive industry in the 1950s and honed across a globalizing supply chain, just-in-time manufacturing aims to precisely calibrate assembly lines and shipments while minimizing stockpiles that weigh on efficiency. Rather than spending time and money to warehouse parts, producers receive goods as needed.
“Fifty years ago you would buy six months’ worth of material and run it out. Now you call your supplier saying you need it for Tuesday and it shows up on Monday night ? We went from just in case to just in time,” said Dennis Darby, CEO of the Canadian Manufacturers and Exporters trade group.
“It’s a very efficient supply chain, but it’s really not very resilient.”
Darby explains that the system works well under optimal conditions, but is vulnerable to unforeseen events. “What happens when you have a perturbation in the supply chain, whether it’s the impact of the pandemic in some countries or a disruption – everything from a container ship in the Suez Canal to China shutting down ports?”
Manufacturing amounts to more than 10 per cent of Canada’s gross domestic product and $354 billion in annual exports – 68 per cent of all exported merchandise – according to the federal Industry Department. That means a wrench in the gears has major repercussions.
The pandemic-driven shortage of semiconductor chips has hurt vehicle producers particularly hard, along with makers of items from smartphones to fridges.
Canada’s auto industry felt the pinch more than most, as producers tended to funnel what semiconductors they had to their bigger, pricier models rather than compact ones such as the Honda Civic or Chevy Equinox, Darby said. “And Canada tends to produce more economical models.”
On top of driving up the price for consumers, the dearth of semiconductors will likely cost the global auto sector US$210 billion in revenue, according to consulting firm AlixPartners. Some 7.7 million vehicles will not be made in 2021, it forecasted in September.
The situation has pushed manufacturers to consider baking in early warning systems for shortages along with more transparency and communication between players, said Brian Kingston, who heads the Canadian Vehicle Manufacturers’ Association.
“Instead of relying on a third-tier supplier who has a relationship with the semiconductor company, there’d be a closer relationship between the OEM (original equipment manufacturer) and the producer,” he said.
Kingston doubts that a fundamental shift to an intricate production system woven over decades and continents is on the brink of rapid unravelling.
But reshoring is already in motion. U.S. President Joe Biden’s $US2-trillion infrastructure plan includes US$300 billion to bolster the American manufacturing sector, setting aside US$50 billion for semiconductor production and research.
Ottawa’s strategic investment fund, including $5 billion over seven years for the “net zero accelerator” laid out in the April budget, aims to boost research and development across sectors, such as the green economy and the fledgling biomanufacturing field.
Analysts also project that demand for rare-earth metals will soar as auto giants will need batteries to electrify their fleets.
“The biggest opportunity for Canada hands down is in critical minerals and rare earths,” Kingston said, citing the country’s “very significant endowment” of cobalt, graphite, lithium and other elements and metals.
But the field is already dominated by China, which accounted for 81 per cent of global rare earth production in 2017, according to the U.S. Geological Survey.
“We do have to move quickly, because it’s a very fast-evolving space and hugely competitive,” Kingston said.
Reshoring production could be appealing _ particularly for industries such as vehicle manufacturing that rely on automation – if plants can be built on cheap land at home, said Anming Zhang, a business professor specializing in transport at the University of British Columbia.
“Asia has a dense population, so land is really not as abundant as what we have in North America. If this automation movement continues then … reshoring may be reasonable and quite natural,” he said.
Scale and flexibility offer other paths around gummed-up supply chains.
Canada’s Semiconductor Council issued a report last month recommending the country form a government-led consortium of chip buyers by 2025 to bolster negotiating power.
Online platforms such as Flexe, which allow companies to share warehouse space and distribution capacity, present a cheaper route to backup inventory, said Maria Jesus Saenz of the Massachusetts Institute of Technology’s Center for Transportation and Logistics.
Meanwhile, recent flooding and landslides that cut vital road and rail links in southern British Columbia further exposed Canada’s supply-chain vulnerability and the need for stronger infrastructure, she said.
Dredged harbours, twinned rail lines and fresh retaining walls offer a limited solution. But new supply channels are tough to carve out, given the limited number of large North American ports – with still fewer alternatives if severe weather or labour issues snarls service to those sea hubs, as happened this fall in Vancouver and Los Angeles, respectively.
“Why have we organized these systems – just-in-time or lean engineering and all that kind of stuff – when the system has proved to be unreliable to a great degree?” asked Brian Slack, a geography professor emeritus with a focus on maritime transport.
“There’s going to be changes” – the only question is how fundamental and far-reaching.