A recent study of more than 600 car models found that the farther a component traveled to reach the vehicle assembly plant, the higher the risk that consumers would report defects in that component. If the component crosses a national border, it gets even worse.
Researchers at Northwestern University found that if the distance between a component plant and the vehicle final assembly plant increased by an order of magnitude, say from 100 to 1000 miles, the defect rate went up by almost 4%. If the supplier was in a different country, that rate tripled. Defect rates increase with distance because problems are not ironed out as quickly over subsequent releases of the component. Designing component parts, and improving them over subsequent releases, is best done with face-to-face collaboration between component and vehicle engineers. Also, visiting each other’s factories—to see how the component is made, or how the component is installed and used—makes improving the component easier. Crossing a border only introduces communication challenges and country infrastructure differences (transportation, material, labor, etc.). Because fewer part defects mean fewer accidents (think brake failures), cutting supply chain lengths in half reduces the accident rate by 0.37%. This finding may be even more critical in an industry like pharmaceuticals, where defects can cost lives.
This research highlights another advantage to regionalizing a supply chain. Supply chains that begin 10,000 miles away will have more defects than shorter ones, driving up manufacturing costs. Hence, re-shoring suppliers begins to make more sense. Key components may even need to be made in the same country as vehicle assembly. This is more evidence of the value of the regionalization in general, where neighboring countries are finding was to work closer together.
Right now, few firms can calculate all of the risks, their implications, and the hidden costs associated with long supply chains. However, as firms get better at capturing these factors in their cost accounting, they may find that a regional supplier base is good for business.
Source: Kellogg World, 15 May 2020.
Photo: Ford