Black Swan Supply Disruptions

Introduction

Black Swan.  The current use of the term was coined by Nassim Nicholas Taleb in his 2010 book “The Black Swan: The Impact of the Highly Improbable”. The characteristics of a Black Swan: (1) An outlier – outside realm of regular expectations, as nothing in the past convincingly points to its possibility); (2) Extreme impact; (3) Appears – after the fact – not so hard to predict, leading to the (false) belief that next time we’ll do better [Perhaps George Santayana, if alive today, would amend his famous quote to: “Even those who remember the past are likely condemned to repeat it – if ‘it’ is a Black Swan”]

As widely reported, the earthquake and tsunami in northern Japan followed a half year later by severe flooding in Thailand – in addition to the tragic loss of life and human suffering – each caused major supply chain disruptions for automotive and electronics parts. While most news articles written about the supply chain disruptions resulting from these two natural disasters focused on lost vehicle production, service parts availability was also adversely impacted.

Natural disasters and economic upheavals (resulting in parts manufacturer bankruptcies) – generate unpredictable disruptions in service parts availability. Though they occur irregularly, Black Swan supply disruptions often enough to be predictable (though not to the level of timing or specific parts). and thus the impacts may be avoided or mitigated with planning and systems. (Supply availability is also compromised when parts fail faster than forecasted.)

Why Disruptions Matter

We should care about Black Swan supply disruptions for service parts because: they are high impact and can be anticipated (at an aggregate level).

Service Parts Profitability.  A number of white papers and presentations from respected institutions peg service parts at 50% of automaker profitability and higher for dealer profitability. See bottom of page for references.

It is widely accepted that automakers and their dealers generate more profit from parts than new vehicle sales (on average). Furthermore, the lack of availability of service parts adversely impacts CSI (customer satisfaction index) which in turn cuts into new vehicle sales. FRFT (Fixed Right First Time) is a leading determinant of customer satisfaction and, obviously, a consumer’s vehicle cannot be fixed right the first time if needed parts are not available. Lowering FRFT adversely impacts repeat service business as well as brand reputation and new vehicle purchase preferences according to studies by J D Powers.

Academic Assessement

The University of Akron’s Fall 2011 Honors Colloquium “The US Big Three Moving Forward” addressed black swan supply disruptions in its October 28 session “Black Swan Events, Supply Chain Interruptions, and the Future”. Professor Bill McHenry (with guest speaker – Ted Fellowes) reviewed how the earthquake and tsunami in Japan, the flooding in Thailand and other disruptions impact the automakers (particularly, GM, Ford and Chrysler) in terms of both parts availability for vehicle assembly as well as for the maintenance and repair of vehicles. A collection of academic and business news articles, reports and white papers were considered. Questions and discussion topics included:

Avoiding and Mitigating Supply Disruptions

The seminar identified several ways to avoid or minimize supply disruptions including:

The seminar focused on way to mitigate the impact of black swan supply disruptions including:

Dealership Response to Supply Disruption.  Dealership checks own inventory, automaker, perhaps other dealers's inventories, then aftermarket sources including remanufactured, then finally salvage – lost sales for OEM parts are real risk.

Mitigating supply disruptions of service parts by tapping dealership parts inventories has been implemented by all three of the Detroit automakers (as well as by automotive importers such as Nissan and heavy equipment maker Caterpillar).  Each of these solutions address parts that are out of stock at all of an OEM's service parts PDCs (parts distribution center warehouses) – that is, “national” back-orders. Order Referral systems attempt to fill orders from an OEM’s own franchised dealerships by “referring” the order to a dealer that is believed to have the part in stock – thus they are generally called "back-order referral systems". In most cases, the dealership fulfilling the order is provided a modest incentive.

Industry experts report that over 80% of parts on national back-order can be found in dealership inventories. That in many, if not most, cases the dealership has no immediate known need for the part (and thus will be likely supply the part in response to an order referral request). In fact, a leading supplier reports in a that up to a quarter of national back-orders are for parts that are idle stock in at least one dealership’s inventory.

A chart of order referral programs by automaker is in the process of being finalized and a partial draft is available in the Charts and Diagrams section of this website.

White papers referenced above: