Executive Summary

Get an Umbrella: Why Honda Should Prepare for the Unexpected.

Honda In 2007, Hondas North American production facilities had produced a total of 13.8 million autos in the U.S. market, sourcing auto components from 516 suppliers in 34 different states ($17 billion worth of goods and services), solidifying its relationships with the suppliers. Production capacity and supplier relationship allowed Honda to consistently beat the rest of the market by thick margins. Nonetheless, operational management setbacks, largely due to the tsunami in Japan and flooding in Thailand in 2011, toppled Hondas production to a halt (efficiency dropped by 50%). The cut in component supplies, especially the specialized ones, crippled manufacturers in other countriesEven if an automaker can somehow find ready replacement sources one missing part is all it takes to shut down a production line. (CNN Money) This problem epitomizes the weakness of Just-In-Time system, represented by Hondas 65% drop in projected profits in fiscal year 2012. In the Center of Maelstrom: Just-In-Time System Just-In-Time System emphasizes three elements ofmanufacturing (1) right products, (2) in the right place, (3) at the right timethereby eliminating excessive and non-value adding time and resources, allowing continuous flow of supplies. The system reduces the in-process inventory, rent and insurance costs related to storage, leading to decreased lead-time and setup time. This results in flexibility and speed in production, perfect for rapid model changes and accelerated development schedules taken by Honda. Nonetheless, Just-In-Time system bears thin hedge against macroeconomic and extraordinary incidents, such as: Economic recession/ Labor market contraction (Predictable) Natural disasters (Unpredictable) Complexity of auto parts (on average 3,000 parts per car) and reliance upon 500 suppliers create untenable production chain, should one or combination of the above incidents occur. Lack of skilled workers cause inability to match growing demands, and specialized auto components lead to the demise of small, uncompetitive suppliers, cutting the number of outstanding suppliers. Under these circumstances, devastation of a natural disaster will be greater. Measures against the Unpredictable (Black Swan Theory) Highly improbable and hard to predict, black swan events have a disproportionate impact. According to the innovator of Black Swan Theory, companies should not attempt to necessarily predict black swan events; instead, they should build robustness against negative ones by diversification. Honda should have the following measures: Diversification of transportation, warehousing, production facilities, and inventory management systems (e.g. dual sourcinghaving secondary manufacturers of a part). Insurance against interruption of business production. Key personnel successions plan, for continued management.