Not many people outside of the automobile industry have probably ever heard of cyclododecatriene (CDT) or one of the materials made from it -- PA-12 (nylon-12). Shortages of CDT and nylon-12, however, are creating concern in the automobile industry. As Jeff Bennett and Jan Hromadko report, "Production shortfalls at a single German auto-parts supplier are beginning to ricochet through the global auto business." ["Nylon-12 Haunts Car Makers," Wall Street Journal, 17 April 2012] They explain:
"Inventories of the resin are being depleted after an explosion last month at an Evonik Industries AG plant in Marl, Germany, that killed two employees. Evonik describes itself as the only integrated maker of the resin, which is used to make fuel and brake lines."
According to Bennett and Hromadko, the CDT shortage is severe enough that "more than 200 auto executives met in a Detroit suburb ... to evaluate a looming shortage of a relatively obscure resin essential to modern auto production." Several Evonik executives were reportedly in attendance at the meeting. Since so many automobile manufacturers rely on CDT, it's surprising that they all seem to have relied on a supplier of the resin that affects nearly half of all production. That seems like a recipe for disaster. An Evonik spokeswoman stated that it will take at least three months to fully repair the damaged plant. John Reed and Chris Bryant report, "Automakers are scrambling to avert a shock to their global supply chain caused by a shortage of [CDT]." ["Supply chain blow to carmakers," Financial Times, 17 April 2012] Bennett and Hromadko report:
"Evonik makes 25% of the global supply of the specialty resin known as nylon-12 and supplies a chemical building block to another company that makes a similar amount. The resin is a precise blend of chemicals that can resist reacting with gasoline and brake fluids."
Reed and Bryant add, "Evonik is one of the industry’s leading producers of PA-12. France’s Arkema, Ems-Chemie of Switzerland and Japan’s Ube Industries are its major competitors." Reed and Bryant report that auto executives at the Detroit meeting "discussed the state of inventories and production capacity of the material, and sought to identify alternative materials or designs to offset expected shortfalls in supply." One of the meeting's participants stated, "It is now clear that a significant portion of the global production capacity of PA-12 (nylon 12) has been compromised." Reed and Bryant write, "The bottleneck highlights the negligible margin for error right now in the global automotive supply chain, which is running on lean inventories three years after the industry's worst crisis in many decades." As I have noted in several past posts, there is a constant tension between those who desire to run companies using lean principles and those who are tasked to manage risk who would prefer operating using resilient principles.
There is nothing inherently wrong with that tension. Creative tension in business is normally a good thing. When one side dominates the business, however, challenges almost always arise. If lean principles dominate, then supply chain disruptions are almost inevitable in today's business environment that is characterized by long and complex supply chains. On the other hand, if resilient principles dominate, a company can have a difficult time competing since its costs are likely to be higher. To read more about the balance that is required between lean and resilient principles, see my posts entitled Supply Chain Resiliency Still an Issue and Supply Chain Risk Management: Tension between Lean and Resilient Principles.
Both articles cited above discuss other supply chain disruptions that have recently affected the automobile industry. Bennett and Hromadko report:
"Last year, production in Japan of Merck KGaA's Xirallic, the shiny pigment in some automotive paints, was disrupted by the March 2011 tsunami and subsequent nuclear power plant problems in Onahama, Japan. Auto makers had to limit or stop taking orders for some cars that used the pigment for certain colors because the plant was the industry's primary supplier of the pigment. The Merck plant was repaired, but disruption rippled through the industry for more than six months."
Reed and Bryant report that the resin shortage marks "carmakers’ third supply crisis in the space of a year. Last year’s earthquake in Japan and floods in Thailand wreaked havoc on some carmakers’ production by causing shortages of semiconductors, paint pigment and other parts."
Jay Phillion, an executive with parts maker TI Automotive Ltd., told Bennett and Hromadko, that the auto industry was searching for quick alternatives to CDT. Phillion's company "has already warned customers that production disruptions are highly possible should there be no quick solutions." According to Bennett and Hromadko, executives at the Detroit meeting "were divided into separate teams. Each was assigned a task, such as finding a replacement material or identifying new firms to produce it." That sounds a lot like closing the barn door after the horse has already escaped. IHS Chemicals analyst Paul Blanchard told Bennett and Hromadko that "there are alternative materials available but they must be tested and produced on a greater scale." Obviously that takes time and time in not on the auto industry's side. As Blanchard put it, "I would be surprised if there is more than a month's worth of inventory out there. We are 19 days into this and the scope still has yet to be defined."
One of the things that a good risk management plan looks at are the perturbative effects of a potential disaster (i.e., how one event can trigger a domino effect throughout the supply chain). The explosion in the Evonik plant has done just that. Bennett and Hromadko explain:
"On April 10, Arkema SA, another manufacturer of the resin, said shortages of Evonik's building block meant it also wouldn't be able to supply its customers with the resin, Mr. Blanchard said. 'The ability of Evonik and Arkema to find alternate sources of CDT [a resin building block] is very limited and it is doubtful that the CDT shortage can be made up. In the short term auto and truck production will be affected,' he said. General Motors Co. said ... it has a global team from its purchasing, engineering and supply departments working to allocate resin and prioritize its needs. Ford Motor Co., Chrysler Group LLC and Toyota Motor Corp. each said they are monitoring the situation, but have not had any reports of production disruptions."
Reed and Bryant also reported on the team that General Motors has put in place to look for solutions to the resin disruption. They note that Evonik employees are part of that team. Reed and Bryant further report, "Volkswagen, Daimler, Ford Motor, and Chrysler said that they had seen no impact at their plants yet." They continue:
"The Japanese crisis was serious enough to impact overall car sales in the US in 2011 and hurt the earnings of manufacturers ranging from Toyota to PSA Peugeot Citroën. After [the Detroit] summit, carmakers and suppliers said they had scheduled a number of follow-up meetings ... to mitigate the impact of the capacity shortfall on their operations. Analysts said that automakers might struggle to find alternative materials or engineer new parts quickly. Because of safety concerns, the design of fuel-injection and braking systems is especially sensitive. 'Fuel, braking and engine components of this type are not easily reengineered,' said Michael Robinet, managing director of IHS Automotive Consulting in Northville, Michigan."
Evonik is struggling to mitigate damage to future sales caused by this disruption. In addition to participating in working groups and rushing to complete plant repairs, it is trying to downplay the effects of the blast. A spokesman for the company told Reed and Bryant, "While we do expect there to be substantial constraints with respect to our ability to provide supplies of CDT-based product, we are nonetheless confident that we will be able to provide alternative solutions in the form of substitutes." Reed and Bryant report that Evonik "is planning to construct a new PA-12 plant in Asia, but said this would not be ready for three years."
This appears to be a situation where a little "what if" scenario planning could have had a big effect on how automakers responded to this situation. Clearly, a company that affects nearly 50 percent of the production of an essential product isn't hard to spot and the consequences of a disruption in its operations shouldn't be hard to determine. Yet no such "what if" planning seems to have been done. Adding to the mystery of why "what if" scenarios weren't considered is the fact that "even before the accident at Evonik, some automakers had been seeking alternatives to the material because of rising prices."
The consequences of the explosion at Evonik don't stop with the auto industry. Bennett and Hromadko report, "Plastic parts made of the resin are key components ... in the photovoltaic industry, and in offshore pipelines. Other uses include sporting-goods and household-goods industries." The Evonik disaster is simply the latest chapter in the supply chain risk management book that is recording an increasing number of disruptions to global supply chains. Big Data technologies are now available that can help industries, like the auto industry, to do "what if" modeling and planning as well as help mitigate disasters once they arise. We all know that prevention is better than cure; but when the worse happens, the faster the system can be made whole the better.