After quake and flood, Honda works on disaster plan for parts
After last year's earthquake in Japan and flooding in Thailand, Honda Motor Co. is asking some Tier 1 suppliers to develop backup production sources for key parts, says Tom Lake, Honda's North American purchasing chief.
Lake discussed Honda's disaster planning, the high cost of parts made in Japan and volatile raw material prices during an interview last month with Production Line correspondent David Sedgwick.
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In the wake of the earthquake in Japan and flooding in Thailand, has Honda taken steps to make its supplier network more robust?
Prior to 2011, we had a very robust system for managing risk among our Tier 1 suppliers. The experiences that we had this year have led us to understand that we need more visibility to risk among our Tier 2 and Tier 3 suppliers.
How are your Tier 1 suppliers mitigating the risk?
We have taken some temporary measures, but the ultimate solution to manage risk is still under development.
What temporary measures?
We are working with our major suppliers to identify our exposure to risk throughout the supply chain. It is not yet a systematic solution.
Are you asking some Tier 1 suppliers to develop dual production sources for key components?
Yes, that can be one of the solutions. Suppliers can develop multiple production locations.
Is that how you are ensuring a reliable supply of computer chips?
It's not limited to any one commodity. We're looking at it from a risk mitigation viewpoint.
The floods disrupted the parts flow to Honda's North American assembly plants. Are you back to normal?
We are back to normal production.
Are you asking any suppliers to move their factories out of Thailand?
We have not determined any long-term direction here. Certainly many suppliers have moved production out of Thailand temporarily. ... We haven't determined any long-term measures.
Which key Thailand-made components have affected production in North America?
We have said that electronic components are the most critical.
How many suppliers does Honda have in North America?
We have about 600 suppliers in North America. We're growing somewhat. We don't have a predetermined number of suppliers that we are trying to achieve.
What is your annual purchasing budget?
In 2010, we spent over $17 billion in local purchases. Based on reduced production levels, we're estimating about $16 billion in purchases this year.
Many automakers are buying more from a core group of suppliers. Are you?
We're in the neighborhood of 100 core suppliers. Our basic direction hasn't changed. We have a core group of suppliers that represent a significant amount of our purchases. If they perform exceptionally well, they grow.
What is the local content of Honda's vehicles built in North America?
Our cars are all in excess of 80 percent. All our engines are domestic, and also the vast majority of our transmissions and steel. In recent years, we have vastly increased our [North American] production of engines and transmissions, so our local content has increased.
With the yen valued at record highs against the dollar, does Honda ask suppliers to build more parts in North America?
Our basic direction hasn't changed. Our job is to develop the most competitive supply base in the world right here in North America. If anything, shifts in the exchange rates just help to encourage the urgency.
Do you have an emergency plan to buy more parts in North America?
We don't have an emergency plan to shift parts production.
Let's talk about raw material prices. Suppliers have told us that plastic resin prices are extremely volatile, and they're struggling to get compensated by automakers. How does Honda deal with plastic resin?
We supply the vast majority of the plastic resin that our suppliers consume. So we don't feel we have an issue related to resin.
So Honda buys the resin and resells it to suppliers?
It's a little bit different than that. We develop products that meet Honda specs and agree [with resin providers] on contract terms, including price. Our Tier 1 suppliers can sign up to buy that specified resin at that specified price to be delivered to their factory.
So plastic resin is a transparent cost to the supplier?
It's transparent. The supplier doesn't hold any of the risk.
Do you do that with steel as well?
We do. We do it with steel and aluminum.
We do not supply copper. We do have a mechanism for suppliers to adjust their pricing based on a price index. But we do not supply copper.
You can reach David Sedgwick at firstname.lastname@example.org.