Rationalizing supply chains improves efficiency, increases risk- shows Japan crisis

Did you know that 74% of all car navigation systems (March 26, 2011) are made in Japan? That’s what a report from 2011 says and highlights risk issues with rationalizing supply chains.

[Note: this post is from March 25,2011 and was updated for formatting issues on May 22, 2021]

As soon as you start looking at the Vendor master data of any large manufacturing operation, you realize that there are a large number of suppliers who seem to be supplying the same type of items. This happens in pharmaceuticals, engineering, technology,chemicals or whatever. So the first step on  supply side efficiency improvement becomes trying to cut down the number of suppliers. Usually a simple 80:20 analysis will result in removing the bulk of the suppliers from whom you buy small quantities anyway. This supply chain rationalization is also one of the first things that happens in mergers of corporations.

This is just great for supply chain and procurement folks,quality and production folks and even accounts receivable and IT folks. You just deal with fewer vendors. Gives you  a lot more time to deal with all that’s going on in the company.

As mentioned earlier, high cost countries are trying to get into high value-add activities which necessarily involves concentration of suppliers. So 74% of the navigation systems are made in Japan and since they do such a great job at a great price there was really no need to split the business with other global auto locations like Germany. There are two implications of such supply concentration:

  1. There is a serious disruption of supplies in case of natural calamities as in the Japanese case.
  2. The prospects for innovating in that category just gets stuck in one location. The navigation systems fit into cars worldwide – so every change means a great deal of retooling and work all around. There is an inertia that sets in and retards innovation ,which has been much researched, but more on that later in another post.

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