Case Study- Supply Chain Management (Distribution)- International Business

 Case Problem

In early February 2021, General Motors reported strong earnings for the fourth quarter despite the COVID-19 pandemic. Auto sales had recovered from a slump that began in early 2020. However, GM announced it would reduce car production at several North American plants due to a growing shortage of semiconductor chips (modern cars use over 50 microprocessors). GM expected its 2021 earnings to be $1.5 to $2 billion lower due to the global chip shortage. Other automakers faced similar challenges. Ford anticipated a 20% drop in its first-quarter 2021 production, while Honda also adjusted its output. Audi in Germany delayed production of some high-end models and furloughed over 10,000 employees due to a significant shortage of chips. Automakers estimated the chip shortage would result in over $60 billion in lost sales in the first quarter of 2021.

The chip shortage originated during the early months of the pandemic. When countries went into lockdown in 2020, automakers scaled back production and delayed future plans. Suppliers of components, in response, reduced their own production and cut back on orders for electronics used in car parts. The assumption at the time was that demand for cars would not recover to pre-pandemic levels for years, but this proved incorrect.

For years, chip manufacturers, many based in Southeast Asia, operated on a just-in-time basis for the auto industry. This helped automakers and suppliers by reducing the need for large inventories. However, when demand for cars dropped, chip manufacturers shifted focus to sectors experiencing increased demand due to the pandemic, such as laptops, servers, smartphones, and video game consoles. The rapid rollout of 5G technology also fueled demand for network equipment and the chips used in them.

The situation was worsened by U.S. trade sanctions against Chinese telecom giant Huawei, preventing it from purchasing U.S.-made chips. Huawei stockpiled chips in response, and other Chinese tech companies followed suit, fearing similar sanctions. This resulted in China consuming a significant portion of chip production in 2020, with chip imports reaching a record $380 billion.

Now, automakers must address the supply chain disruptions caused by the chip shortage. Existing chip factories are running at full capacity, and building new ones takes around 18 months and billions of dollars. In the short term, chip manufacturers are asking for longer lead times on orders and raising prices for expedited orders. Automakers like Volkswagen are rethinking their supply chains, with some considering buying chips directly or reserving manufacturing capacity with chip suppliers. This shift means automakers will need to work more closely with chip manufacturers and may have to maintain larger chip inventories for supply security.

Toyota appears to have managed the chip shortage better than its competitors. Early in the pandemic, Toyota stockpiled chips and maintained close relationships with its suppliers. The company provided reliable production volume forecasts and a long-term production plan, helping it secure chip supplies during the crisis. While Toyota saw a recovery in revenues and profits in the second half of 2020, it also expected continued growth in 2021, unlike many of its global rivals.

Sources: W. Boston, A. Fitch, M. Colias, and B. Foldy, “How Car Makers Collided with a Global Chip Shortage,” The Wall Street Journal, February 12, 2021; S. McLain and K. Narioka, “Toyota Profit Quickly Recovers Despite Chips Shortage,” The Wall Street Journal, February 10, 2021; D. Wu, S. Kim, and I. King, “Why the World Is Short of Computer Chips, and Why It Matters,” Bloomberg, February 17, 2021; A. Trivedl, “The Severe Shortage of Chips that Car-makers Are Faced With,” Mint, January 20, 2021.

Questions & Answers

As global markets expand and trade barriers decrease, firms face several interconnected challenges. First, they must decide where to locate production activities. Should these be concentrated in one country or spread globally, aligning with variations in factor costs, tariffs, and political risks to reduce costs and maximize value? While single-country strategies may be operationally efficient, they often fail strategically. For instance, focusing production in one country could be risky if that country faces political instability, economic downturns, or unexpected tariffs, as seen with China. Additionally, events like the COVID-19 pandemic can disrupt production, as occurred in 2020 when many factories closed, affecting global supply chains, particularly in the automobile industry. To manage such risks, redundancy in production and supply chains is typically necessary, involving distributing production across countries and maintaining buffer stocks. Toyota, for example, navigated the 2020-2021 chip shortage more effectively by stockpiling critical inventory and planning with suppliers well in advance.

The second issue concerns the long-term role of foreign production sites. Should a firm relocate production if factor costs change, or is there value in staying, even with shifting economic conditions? Moving solely for cost reasons is usually not strategic; successful firms balance cost with considerations of quality, flexibility, and time. However, cost remains a crucial factor in deciding whether to shift production sites.

Third, firms must decide whether to own foreign production activities or outsource them to independent vendors. While outsourcing can be cost-effective, it reduces control. Fourth, the management of globally dispersed supply chains and the role of information technology in logistics, sourcing, and operations must be considered. Fifth, firms must determine whether to manage supply chains themselves or outsource this function to specialized enterprises. Many companies outsource parts of the supply chain but must decide which elements to manage internally.

Managing global supply chains is essential for operational efficiency, linking global production with global customers. These supply chains are often complex and geographically fragmented, particularly in multinational corporations' networks of suppliers.