Supply chains at full stretch

2 August 2010

3 August 2010 | Lindsay Clark

After scaling back production during the downturn, manufacturing suppliers are now struggling to meet increasing demand. Lindsay Clark reports

Should we be alarmed that almost four in ten buying professionals in the SM100 think supplier capacity is insufficient to cope with increased demand post-recession?

If the recent example of Nissan is a sign, then maybe we should. Last month the automotive giant temporarily stopped some production lines in Japan because of delays to electronic parts from Hitachi, which is in turn, dependent on integrated circuits (ICs) from STMicroelectronics.

A spokeswoman for the carmaker said: “Nissan has been assured by Hitachi Automotive Systems that this is a short-term delay for engine control modules.”

Production eventually restarted after a three-day halt.

Hitachi said in a statement that the firm had taken steps to resolve the issue. “Hitachi is in a tight demand-supply balance of IC for engine control units. This caused a supply shortage for Nissan.”

Although STMicroelectronics would not comment on specific issues at Hitachi, a spokeswoman said: “The recovery of the automotive business after the crisis is taking place at a faster rate than expected and that the whole automotive electronics supply chain is currently under pressure to keep up with the market’s demand.

“The most recently disclosed data for ST show a year-over-year growth for automotive devices of 61 per cent and the company is strongly engaged in keeping the commitments it has made to its customers.”

And that growth is certainly evident in the UK. Since the beginning of the year, car registrations have climbed by more than 10 per cent, while car production rose by nearly 28 per cent in the same period, according to figures from the Society of Motor Manufacturers and Traders.

In a broad sense these are sure signs the economy is picking up – and quickly. After all, just two years ago Nissan was closing lines because of a slump in demand. But it also creates the spectre of stretched supply chains and difficult demand forecasting, which is likely to be replicated across the manufacturing sector.

“I don’t think anyone predicted how quickly the economy would bounce back and suppliers are struggling to keep up with demand right now,” said Martin Wakelin, purchasing director at manufacturer Trelleborg Sealing Solutions.

“This is partially down to reduction in capacity and the amount of time it is taking to re-instate and partially down to lack of forward visibility throughout the supply chain,” he adds.

Frank Omare, supply chain and operations advisory services, Ernst & Young, echoes that view. “Suppliers faced financial challenges due to price reductions demanded by their customers and in some instances, experienced difficulties in securing working capital from the banks,”
he says.

“Suppliers scaled back their capacity in response to a fall in demand, in addition to the lack of working capital to fund their day-to-day operations. As the global recession starts to lift, suppliers are still reluctant to re-invest in capacity until full confidence returns to the market.”

For other firms, it is a conscious decision. Gareth Martin, senior purchasing manager at NXP Semiconductors, says some supply chains were choosing not to keep up with demand.

“Rising demand was not accurately forecast within the semiconductor market,” he says. “Many supply chains have chosen not to keep pace for either strategic reasons or because the depth of the recession has left them unable to finance or resource a rapid expansion, given uncertainty about the longevity of the upsurge in demand.”

Even if this pessimism turns out to be misplaced, over-cautious suppliers could inadvertently cause further supply chain interruptions.

And considering the results of the SM100 suggests only 54 per cent of purchasers believe that supplier capacity is able to keep up with rising demand, this scenario remains a distinct possibility.

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