May 3, 2017

Critical Materials, from Just-in-Time to Just-not-There

Material Risk is Driving Manufacturing Decisions

Just-in-Time manufacturing practices extended to suppliers have resulted in many benefits, including efficiency gains, but have also left supply chains vulnerable to disruptions in primary material supply. According to a 2011 report by global consultancy giant PricewaterhouseCoopers (PwC), over three-quarters (77%) of senior executives surveyed from 69 leading global manufacturing companies in different industrial sectors rate mineral and metal scarcity as the number one business risk to their companies' success. Indeed, in an introduction to scarcity of metals presented in our June 2015 COE-SM newsletter, a visiting research group from Yale University revealed that among the most critical materials, more than half are classified as companion metals; meaning their value can only be realized when combined with other similarly critical materials. For industries such as electronic technologies, medical imaging devices, and renewable energy systems, this reliance on material companionship, combined with the underlying risk of scarcity, only serves to compound the risks companies in these spaces endure. But what are the key factors in these material risks, and what parts of industries are likely to be most affected?

Where Risk Lies for Advanced Materials in Advanced Technologies

The objective of the PwC survey was to aggregate and compare responses on subjects such as awareness, preparedness, impact, risk and opportunities of tackling this impending risk caused by scarcity of critical metals and minerals. The metals and minerals on the "critical" list include beryllium, cobalt, tantalum, fluorspar, lithium, etc., that are critical to manufacturing in automotive, aviation, chemical, energy and utilities, high tech, infrastructure and renewable energy industries. One of the interesting findings of the report is that increasing demand caused by the growing middle class in the developing countries, inefficient markets and geopolitics is the major factor responsible for scarcity, as opposed to dwindling physical supplies. The PwC survey indicated that risk from minerals and metals scarcity was expected to increase across all industries surveyed through 2016. At the time of the survey, instability of supply was indicated by a large percentage of respondents as a major issue in sectors such as renewable energy (78%), automotive (64%) and energy & utilities (57%). Automotive industry respondents indicated that components using scarce minerals and metals constitute more than 25% by weight and more than 25% in the value of the final product. Respondents from the energy & utilities and infrastructure sectors provided very similar responses with scarce materials consisting of over 25% of usage by weight.

Stratgies for Addressing Risk

All the executives surveyed have rated proactive identification and mitigation, improved collaboration between different stakeholders in the supply chain, and development of novel business models as the top short-term solution strategies. Other strategies mentioned in the survey report included increased efficiency, material substitution, coordinated purchasing policy, forward contracts, and closed-loop systems. The report aggregates inputs from survey respondents and presents a ten-point checklist aimed at helping manufacturing companies proactively tackle this material scarcity issue and mitigate associated business risks. Interestingly. the top four items of the checklist all deal with one thing: developing indicators and risk-assessment methods. In this, the first (and perhaps most important) step in addressing material criticality is to understand exactly how your company is at risk, what the magnitude of potential consequences may be.