How 2 suppliers are getting ready for the next disaster

TOKYO -- For months after Japan's killer earthquake, two auto suppliers that were all but unknown before the disaster were grabbing headlines for all the wrong reasons. Renesas Electronics Corp. and Merck KGaA emerged as key bottlenecks blocking vehicle output worldwide.

Today, those two companies' operations are back to normal. But rebuilding at the microchip company and paint pigment maker is far from over: They are readying their operations for the next disaster. And the lessons they learned the hard way through months of lost business are a template for the entire supplier industry as it tackles newly discovered supply chain liabilities.

The main strategies: Make parts at multiple locations, source subcomponents from alternative suppliers, reinforce factories against bigger temblors and work with customers to create larger emergency stockpiles of critical products.

The changes will leave Renesas and Merck better prepped for the next disaster. But fully implementing improvements will take a long time. And while those two know firsthand the urgency of change, other suppliers may drag their feet on similar changes, remaining weak links in the supply chain.

Renesas, the world's No. 1 maker of the tiny computer chips called microcontrollers that go into such products as engine control systems, dashboard instruments and steering mechanisms, has a three-pronged approach to disaster-proofing:

1. Cover 90 percent of its chip lineup with dual site manufacturing capability.

2. Reinforce buildings, lines and tools at its 10 chip foundries in Japan by mid-2013.

3. Urge automakers to hold as much as two months of emergency chip inventories.

Renesas expects to spend hundreds of millions of dollars to buttress its factories, says Shuichi Inoue, general manager in charge of production technology. The effort will cover everything from walls and exhaust systems to chemical tanks and wafer furnaces.

The mammoth 9.0-magnitude rumble last March 11 provided a benchmark for what the company needs to prepare for.

"From the experience of the quake, we know what will happen: which tools will be badly broken and difficult to repair, and which break easily but fix easily," Inoue says.

Renesas also is backing up its chip-making sites to enable production of its microcontrollers at alternate factories. The company wants to complete the factory reinforcements by September 2013 and have 90 percent of its chip manufacturing dual-sited by April 2014, up from 80 percent today.

If a quake as violent as last year's hits again, the measures should allow Renesas to resume output within one month, compared with three months last time. Says Inoue: "I pray it won't come until we're ready. I need more time to reinforce everything."

Before last year's disaster, automakers typically held one to three months of emergency inventories of microcontrollers.

Renesas is telling them to take on another two months of inventory until the production lines are secured, Inoue said.

Merck, the German pigment maker whose lost production in Japan forced carmakers to stop taking orders for cars of certain colors, was also quick to diversify.

Just two weeks after the quake, Merck's board fast-tracked a decision to build a backup line for its Xirallic pearl luster paint pigment outside of Japan. They picked a site in Gernsheim, Germany, aiming to open it by the end of 2011.

But even though the changes were fast-tracked, they have taken time. Delays pushed the target start date to the end of March. And the qualification process with customers likely will consume the rest of 2012, says Adalbert Huber, the head of Merck's global coatings business.

"These were optimistic assumptions shortly after the disaster," Huber said of the initial target date. "It was impossible."

When the German plant comes on line, it will boost global Xirallic capacity about 20 percent. At the same time, Merck has made other big changes to lessen risk.

It is now stockpiling a four-month supply of the sparkling metallic pigment at four warehouses -- in the United States, Germany and two in Japan.

Before the quake, it kept significant inventory only in Onahama, Japan, at the world's sole Xirallic manufacturing plant -- which was knocked out by the temblor.

Merck is reinforcing some parts of its plants against future quakes. But in other areas, where engineers can't tamper with the manufacturing setup, it is making sure that it has enough spare parts in stock to whip up quick repairs if needed.

The changes come even as Merck ramps up production of a new pigment at Onahama called Meoxal. That product has a similar metallic radiance to Xirallic but works better with yellow and red paints to cover surface irregularities. Meoxal production, set to begin early this year, was delayed to midyear by the quake.

Merck says last year's shutdown hasn't cost it any customers. But sales still haven't returned to pre-quake levels. That's partly because it takes time for carmakers to switch back to Xirallic after altering their color offerings in its absence, Huber says.

"The dealers say it was a sales driver, so they want to replace with Xirallic again," he says. "I think we will soon come back to the quantities before the crisis. Maybe quite soon this year."