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General Motor’s Chip Shortage, The End of Lean?

What happens when the world stops turning? This exact event occurred with the beginning of the COVID-19 pandemic and the subsequent failures of supply lines worldwide. Never before in modern times has there been an event that so completely disrupted manufacturing and supply processes as the pandemic has. Indeed, there has been pandemics before, but when combined with the modern practices of globalization and outsourcing/offshoring, a shutdown of this nature was absolutely devastating. One of the finest examples I can conjure of this total failure is the computer chip shortage that is currently ravaging General Motors output marks. This written blog will outline exactly how this failure occurred, what is being done to fix the shortage now, and what will be done in the future to assure this lapse in preparedness will not occur again.

All major incidents of failure begin with one catalyst, in this case, the COVID-19 pandemic that began in China. As a manufacturing and exportation hub for billions of people, this beginning point was already quite devastating. Even before the disease went global, millions of businesses and factories shut down in accordance with tight restrictions from the government in China. This includes all mines, fabrication industries, and tech shops under Chinese influence. Manufacturing slowed to a halt, and Chinese economics grinded to a practical standstill. However, even these tight restrictions could not stall the spread of COVID-19. Soon, country after country began implementing some form of shutdown or business closure. With this background in mind, lets take a closer look at China. China is one of the leading manufacturing countries in the world, with close to 4 trillion dollars added to their economy per year from manufacturing alone. Manufacturing makes up around 30 percent of their total economic environment, and a portion of this is dedicated to the mining/refining of rare earth metals. China also contains the majority the world’s rare earth metals, estimated to be around 44 million tons. One of the critical components of microchips that General Motors utilizes in their automobiles are these various rare earth metals. Because of all of this, once China ground to a standstill, so did the refining of rare earth metals, and as a result, a lack of manufactured microchips became present! This issue was compounded in GM’s case, as the vast majority of microchips that they bought were sourced from China.

One of the first courses of action that GM (and for that matter all companies that utilize this chip technology) did was to attempt to move their supply lines out of China and into other nations. However, this was found to be incredibly expensive and not practical. The real issue of the shortage was that the raw materials that go into manufacturing the chips, the “Tier 3” suppliers, were shut down in China. When companies attempted to switch their supply lines to other nations, they found that they were suffering from the same problem: a lack of inputs. China simply dominates the market when it comes to the inputs for microchips, and thus such a catastrophic event such as COVID-19 beginning in the area that it did was the ultimate “Black Swan” event. Other nations with these inputs within their borders such as the US and Australia began to ramp up their production, but by then it was far too late. This lapse in production created a massive bullwhip effect, which was felt when inventory reserves at General Motors were used up. This resulted in factory shutdowns all over the globe, as fully finished trucks and cars could not get sold due to missing a part that was smaller than your hand. As of current, the automotive industry estimates the chip shortage could amount to around 61 billion dollars in lost sales, with General Motors alone claiming a 2-billion-dollar profit loss for 2020.

Now that the scope of the issue is fully understood, let’s examine what is currently being done to try to resolve the shortage at hand. Along with the previously mentioned manufacturing overhauls in less effected countries, General Motors personally invested millions of dollars into their tier suppliers in an attempt to jumpstart the process of manufacturing. From designing new systems of social distancing within plants to restructuring how materials are sourced, everything GM has done since the pandemic hit has been an effort to stem the bleeding. These are, for all intents and purposes, band aid measures that help alleviate the problems caused from the shortages, but they do not address the underlying issues of input scarcity. To address these, radical changes must be made to both GM’s supply chain and the modern lean thinking as a whole. For GM’s part, early attempts at diversification of supply lines and multiple backup sources of inputs are being examined. Most recently, General Motors CEO Mary Barra stated that, “Serious overhauls to General Motor’s Supply Chains must be enacted” and “General Motors is now building direct communications with primary manufacturers of microchips”. This move will make GM more vertically integrated with their supply line, meaning that they will have stronger control over their needed resources in the future.

In speaking of the future, it is important to ask what will be done to prevent an occurrence such as this from happening again. The answer to this question will fundamentally change how supply chains are structured from the ground up. “Lean thinking” has dominated the philosophy of how resources are moved and organized since the early 1970’s. This thinking has greatly increased the efficiency and cost effectiveness of supply lines worldwide. By cutting down on waste and redundancies, while also focusing one’s company on what its best at, great feats of business were achieved. Due to the nature of this lean thinking, however, companies became stretched thin, and their supply lines became vulnerable. Buyers mismanaged risk, sourcing critical components of their products to (in many cases) just ONE supplier in an attempt to save money while reducing waste. While no one could have reliably predicted an event as devastating as the pandemic, it was this lean thinking that was partially responsible for the worldwide collapse of supply lines that we see today. The lack of backups, of redundances, and the practice of offshoring/outsourcing weakened the control companies had on their critical inputs, which in turn left the whole system incredibly vulnerable. This begs the question then: Is lean thinking dead?

The answer to the above question is no, with some caveats. In order to account for drastic, “Black Swan” style events, lean thinking will have to undergo a form of metamorphosis, maintaining it’s commitment to waste reduction/cost efficiency while also adding an increased emphasis on risk management. The message of “Lean” should no longer be, “Reduce waste/cost as much as possible” but rather it should be, “Reduce wisely, and form redundancies for your most critical inputs even at the cost of efficiency.” To summarize, companies of the future will need to use this modified form of lean to build strong, change resistant supply lines while also attempting to keep costs low/waste reduced. This will come in the form of multiple lines of sourced inputs, a further examination of supply lines in risk prone areas, and a more vertically integrated organizational structure. It is through these future changes that companies will redefine how business is conducted in a modern, globalized world.

Authored by: Collin Blanchard

References:

1. https://money.usnews.com/investing/news/articles/2021-09-17/barra-gm-will-make-substantial-shiftsin-supply-chain-over-chips

2. https://www.scmp.com/news/china/diplomacy/article/3130990/chinas-dominance-rare-earths-supplygrowing-concern-west

3. https://www.verdict.co.uk/general-motors-chip-shortage-supply/

4. https://www.wsj.com/articles/gm-plans-to-idle-factories-longer-amid-chip-shortage-11631819780 5. https://www.cnbc.com/2021/09/06/vw-ford-daimler-fear-chip-shortage-could-persist-for-sometime.html

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