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Interruption poses a threat to joint overseas ventures.

Interruption Poses a Threat To Joint Overseas Ventures

In the spring of 1986, Chrysler Motors Corporation and Mitsubishi Motors Corporation created Diamond-Star Motors, a jointly owned corporation, to build and operate an automotive production plant near Bloomington and Normal, IL. That was the beginning of a $600 million two-million-square-foot plant with facilities for stamping sheet steel, manufacturing and forming plastic and assembling automobiles. It was designed to produce 250,000 cars annually.

Planning for the plant began more than a year before the first ground was broken and continued through the start of production. It involved extensive work and numerous meetings with architects and engineers, building contractors, technicians, fire protection engineers, process and production planners and many others. It also required the development of cooperative working relationships between people with vastly different cultural and organizational backgrounds and the coordination of different methods of designing and operating plants and conducting business.

Before the plant went into operation, a team of Chrysler and Mitsubishi executives, technicians, supervisors, and some of the plant workers went to Japan in order to be trained in the Japanese team concept, and is the basic operating philosophy of Diamond-Star. As an example of how thoroughly this team idea permeates the plant operations, everyone, from the CEO to the sweeper, wears an identical uniform.

The facility, which went into operation in September 1988, is the most highly automated and labor efficient car assembly plant in the world. It uses more robots and fewer human workers in its operations than any similar plant. It is also a highly integrated operation with facilities for stamping out car body panels and for making plastic and forming it into bumper fascia and other decorative and protective automotive components.

Many small parts used in the Plymouth Laser and Mitsubishi Eclipse, two cars built in the plant, however, are manufactured by outside suppliers. One major supplier, Eagle Wings, a U.S. company formed by a consortium which supplies parts to Mitsubishi Motors in Japan, has built a parts plant near Bloomington-Normal. Because it is difficult and expensive to ship major body parts (especially for a one-plant operation), they are stamped out at Diamond-Star's assembly plant. Although a car body is a very strong structure because its various components are braced and butressed in such a way that they support each other and form a rigid box, the individual pre-assembled parts are very fragile and can be easily damaged if they were shipped. They would have to be separately packaged and handled carefully to avoid contact with each other and other objects and to prevent twisting and bending.

The inside of a modern car assembly plant resembles a giant beehive or anthill, with workers and materials constantly moving in all directions for a common purpose but a vast number of specialized activities. The three main divisions of a car assembly plant are called body-in-white, paint shop and final trim and chassis.

Body-in-white, named for the silvery color of sheet metal, is the operation in which body parts are assembled and welded into a car body. The individual parts are clamped into jigs and then welded by robotic machines.

The paint shop is where the car bodies are cleaned and painted. It contains a maze of equipment including dip tanks, spray booths, drying ovens, paint storage and mixing rooms, miles of piping to carry paint from the mix room to the spray booths and an elaborate array of air handling equipment required for proper application of the paint and to properly dispose of the solid and atmospheric wastes which are generated by the painting process. Because of the importance of the paint shop to the overall operation of the plant and the expense and time it would take to repair or replace the shop in case of a loss and the volatile nature of the materials used there, the paint shop is the most critical target of the plant's fire prevention effort. No expense is spared to provide the most sophisticated fire detection and suppression equipment available to prevent what could easily be a catastrophic fire.

The trim and chassis assembly area is where the engine, the wheels, the brakes, the interior and exterior trim, the electrical system and the other components of a finished car are attached to the painted body. This is also the area in which the car is given its final tests and sent to the shipping lot on the way to the customer. When the plant is in operation, the trim and chassis area looks like a giant seething mass of people and material feeding an enormous worm winding its way through the plant. When the plant is shut down for a model changeover and the stock is removed, it looks like a dance hall interlaced with miles of conveyor lines. The trim and chassis area is essentially a material handling plant; parts, components and materials are delivered to the plant by trucks and trains and then are brought to the assembly area where they are put into the cars as they move down conveyor lines until they come out as finished cars.

The Problem

The equipment which is needed to operate the plant was designed and built in Japan. Although the Diamond-Star plant was closely patterned after a plant in Japan that makes the Mitsubishi Mirage, a car which uses the same drive train and major chassis components as the Plymouth Laser and Mitsubishi Eclipse, the equipment was specially designed and manufactured for use by Diamond-Star and replacement equipment is not available, except by rebuilding from the ground up. Some of the equipment, notably two 3,700-ton multi-stage Komatsu presses, would take at least a year to reproduce and then several weeks or even months to ship and reinstall in the plant.

Although there were no disasters, the whole project was overshadowed by the specter of a ship laden with a gigantic Komatsu press or a load of chassis kits sinking in the Pacific, delaying the start-up of plant operations and leaving the company without the revenues it needed to pay its staff and make its debt service/rent payments. To survive, the company had to have its equipment in place and ready to produce cars at the scheduled time and it had to stay in business, which meant that it also had to have a steady and dependable supply of chassis kits from Mitsubishi. Thus, Diamond-Star has been dependent from the beginning on a thin and fragile pipeline, in the form of an endless line of ships running from Japan with a railroad link to Illinois.

The automobile business is volatile and highly competitive. It is subject to great public enthusiasms and fierce loyalties, but it is also subject to rapid changes in taste and attitudes and great impatience with delays. If the car you make, which people want today is not available today, especially if it is an unproven and unknown car, they will buy something else.

If a new car is going to succeed, it has to ride in on a wave of public interest and enthusiasm and it has to develop and maintain a high level of customer satisfaction and loyalty. A lot of time, money and effort is spent in generating that interest and making sure it will peak at the moment the car is introduced to the public. Nothing will dissipate it faster than a delayed introduction after a carefully orchestrated pre-introduction buildup. And once you lose it, it's almost impossible to get it back.

Besides the technological wonders of its plant, one of the outstanding strengths of Diamond-Star is its commitment to the Japanese system of teamwork and the development of a remarkable spirit of cooperation and enthusiasm which can only be maintained by practice, by people constantly working together. A protracted shutdown of the plant would also erode that spirit and detract from the efficiency of plant operations.

In short, the plant could not afford to be shut down. But it was exposed to the risk of a shutdown and severe economic loss by the very nature of the way it was equipped and supplied. Consequently, Diamond-Star faced considerable business interruption/extra expense insurance exposures.

To analyze the Diamond-Star exposures, we can look at the presentation of this ocean cargo/business interruption risk to insurers in the United States and in London. Exhibits 1-3 reflect the coordination of the manufacturers delivery schedule with the construction milestones of both the building and the plant. They also provide some idea of the logistics required to arrange the ocean and inland transportation of all equipment from Japan to the United States. Furthermore, they show the scheduling of critical equipment, the loss of which would trigger a business interruption loss.

In presenting the risk to underwriters, the brokers first provided a summary of pertinent information. The machinery and equipment sourced in Japan was valued at $275 million. The voyages were from Japan via Nagoya to Baltimore and Philadelphia and then over land by rail to Chicago and truck to Bloomington, IL. The marine coverage was all-risk and included war, strike, riots and civil commotions. U.S. import duty coverage was also purchased.

The business interruption insurance coverage was also on an all-risk basis. Diamond-Star chose a limit of $150 million, subject to a 30-day deductible, from the production commencement date of November 1, 1988. Each vehicle manufactured was valued at $1,791. Of that amount, $1,000 represents profit, and $791 represents continuing expenses (i.e., taxes and financing). The insurance was arranged on a valued policy form, utilizing the $1,791 per vehicle. Nine hundred thirty-one units are produced each day. The daily indemnity is $1.67 million, which translates into a $50 million monthly business interruption exposure.

Exhibit 1 lists key equipment and shows the time of shipment, as well as the recovery period required to obtain replacement equipment. The primary time for shipments on ocean vessels were from April 1987 through October 1987. The exceptions were the stamping dies, which were shipped from July 1987 through March 1988. Some welding jigs were shipped in January 1988. These late shipments of welding jigs and stamping dies were via air. Later on, it becomes evident just how critical these stamping dies and jigs are.

Exhibit 2 reflects the shipment schedule of all equipment as of March 10, 1987. The press shipments are an exception to the normal voyages, which were from Japan to Eastern United States ports and then inland. These five stamping presses were carried to New Orleans and were scheduled to travel by barge to Peoria, IL, and then by truck to Bloomington. Due to the drought conditions in the spring of 1987, the depth of the water in the river prevented the initial voyage. This heavy equipment had to be transshipped at St. Louis and carried by truck to the plant site, a considerably longer distance, requiring more time.

The riggers in the United States use an entirely different method of putting together these two very large units, which are part of each press. Each unit is about the size of a basketball court and about 30 feet in height. In Japan, they utilize cranes in combination to lift these presses, and then place the top part on the base unit. In the United States, riggers arrange for hydraulic lifts on wheeled platforms. They lift the top unit and tow it very slowly over the base unit. Each of the units were safely assembled, although there was much concern on the part of engineers from Japan who were not used to the American method of installing this type of equipment.

The average shipment required 45 days, whereas the stamping presses was estimated at 70 days, which was increased because of the effect of the drought. The computer controls were shipped via air in 1987. Some later shipments of welding jigs and dies were also shipped via air.

Exhibit 3 shows the replacement period for critical equipment. These items could not be replaced in less than the time allocated because of the need to be remanufactured. For example, in the case of the stamping presses, the last date for a reproduction order to be given to the manufacturer was July 1987, which was the date the last shipment was due to arrive. If two out of the three press unit shipments were lost, there would be a manufacturing delay. The second and third columns show that it would require 20 months to replace, reship and reinstall the presses. All this equipment had to be remanufactured in Japan because of the design engineering involved.

The most critical parts are the welding jigs and dies. If lost, manufacturing would have been delayed for five months to replace the welding jigs and for three months for the dies. You will note their relatively late shipment.

Diamond-Star agreed to make every effort to obtain outside vendors to supply and process some parts to supplement the production of any damaged equipment. There are no replacements available for this critical machinery and equipment.

Quotations were received from CIGNA, and other U.S. insurers followed the lead. As additional capacity was needed, the London market was approached by Johnson & Higgins of Illinois through Willis, Faber & Dumas, Ltd. J&H did a most professional marketing job, which required a significant investment of time to discuss this risk with U.S. insurers. Marketing began on March 23, 1987, and was completed by April 10 for a $150 million limit. The firm successfully completed this large and difficult exposure on a quota share basis in the U.S. and London markets. There were general price quotations based on different deductibles.

Diamond-Star's board of directors reviewed the quotations and decided not to purchase the business interruption insurance. The decision was based on the belief that the company had sufficient time to reorder critical key equipment to avoid a serious business interruption loss. As mentioned, no significant transit loss occurred, and the Diamond-Star plant became operational ahead of schedule. As the original equipment purchase terms were then changed to a CIF basis, the ocean cargo physical damage insurance was arranged by the supplier in Japan.

Diamond-Star, appreciative of J&H's effort to arrange the business interruption insurance, named J&H broker on the ocean cargo policy covering imported parts for automobile production. [Exhibits 1 to 3 Omitted]

J. Eugene Kerwin is manager of property insurance for Chrysler Corporation in Highland Park, MI. J. Donald Shea is vice president and insurance director for Mitsubishi International Corporation in New York. This article is based upon their presentations at a recent American Institute of Marine Underwriters seminar.
COPYRIGHT 1989 Risk Management Society Publishing, Inc.
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Author:Kerwin, J. Eugene; Shea, J. Donald
Publication:Risk Management
Date:Oct 1, 1989
Words:2439
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