The last dance of Just-in-Time?

A Tsunami struck Japan in March 2011 generating a collapse of Toyota supply chain. Starting in 2011, Toyota decided to completely revise its famous Toyota Production System and forced suppliers to hold a few months’ worth of inventory, threatening the entire philosophy of Just-in-Time. In 2015, Toyota was satisfied of its revised production system and ready to deal with future hits. Toyota didn’t know that the second biggest earthquake in the modern history of Japan would soon arrive.

2011 tsunami, a hard lesson for Toyota

In March 2011, Japan was shocked by a deadly earthquake and Tsunami. The 9-magnitude quake was the largest tremor to hit the country since 1850.[i] At that time, Toyota built 45% of its vehicles in Japan. After the earthquake most of Toyota’s Japanese plants were closed for nearly two months. In addition, Toyota’s north American production was cut to 30% for the subsequent 6 months due to a shortage of 150 different parts which should have been produced by Toyota’s Japanese plants.[ii] Toyota had a 77% fall in profits in the second quarter of 2011, equivalent to $1,36BN.[iii]

To mitigate risks in case of future hits, other Japanese automakers started to build redundant inventory, selected multiple or even redundant suppliers[iv] and adopted more standardized components for different vehicles.[v] The entire philosophy of Just-in-Time was under attack and Toyota had to decide how to react.

Toyota action plan and 2016 unplanned testing

In 2011, Toyota executive VP Shinichi Sasaki told Reuters that Toyota is developing a five-year plan that would enable a recovery from a hit within two weeks.[vi]

The plan comprised four actions. First, Toyota adopted some components that are standardized across all Japanese automakers so that they could be manufactured in several locations and shared among automakers if needed.[vii] Then, Toyota built a database with information about thousands of parts stored at 650,000 supplier sites, which helps bypass bottlenecks when one supplier gets knocked out of commission.[viii] In addition, Toyota decided to regionalize the supply chain. Regionalization will reduce the fragility of global supply chains containing the impact of a disruptive event to a single region. The last action was to force suppliers to hold as much as a few months’ worth of inventory of specialized components.[ix]

Toyota had a hard-testing of its revised production system when a series of earthquakes happened in April 2016.[x] Toyota initially suspended all production in Japan. But within days Toyota bounced back with plans to bring the plants online starting April 25. Toyota restored full production by Thursday, April 28.[xi] The success of the hard-testing showed that Toyota was on the right path.

Nevertheless, with extreme events becoming more probable, Toyota should further improve its supply chain resilience. In this light, Big Data could support Toyota in increasing the overall transparency of its supply chain, providing live information about potential disruptive events at supplier sites, their inventory level and WIP status. Toyota should also consider a dualization of its most relevant suppliers, switching from a single supplier to a more balanced approach which would involve different suppliers delivering same components. Last, inventory management needs to be integrated in the Toyota philosophy. The Just-In-Time is an efficient way to reduce wastes but not resilient to unpredictable extreme events.

Is this the end of Just-in-Time?

In a world in which disruptive events happen more often it is vital for all companies to manage the trade-offs between supply chain efficiency and risk reduction.[xii] Just-in-Time does not seem to be flexible enough to cope with disruptive events. Nevertheless, Just-in-Time philosophy remained almost unchanged in last 30 years, thanks to its high cost efficiency.

How will companies integrate Risk management and Just-in-Time? Will companies be willing to invest in risk reduction and supply chain resilience to hedge against extreme events but potentially losing competitiveness?

(Word count: 789)

 

Sources:

[i] http://news.trust.org//spotlight/japan-earthquake-and-tsunami-2011

[ii] Canis, B., 2011. Motor Vehicle Supply Chain: Effects of the Japanese Earthquake and Tsunami. Diane Publishing.

[iii] Cameron A. MacKenzie, Joost R. Santos, Kash Barker, Measuring changes in international production from a disruption: Case study of the Japanese earthquake and tsunami, International Journal of Production Economics, Volume 138, Issue 2, August 2012, Pages 293-302

[iv] Hirofumi Matsuo, Implications of the Tohoku earthquake for Toyota׳s coordination mechanism: Supply chain disruption of automotive semiconductors, In International Journal of Production Economics, Volume 161, 2015, Pages 217-227

[v] YoungWon Park, Paul Hong, James Jungbae Roh, Supply chain lessons from the catastrophic natural disaster in Japan, In Business Horizons, Volume 56, Issue 1, 2013, Pages 75-85

[vi] https://www.reuters.com/article/us-toyota/toyota-aims-for-quake-proof-supply-chain-idUSTRE7852RF20110906

[vii] Fujimoto, Takahiro. “Supply chain competitiveness and robustness: a lesson from the 2011 Tohoku earthquake and supply chain “virtual dualization”.” Tokyo, MMRC Discussion Paper Series (2011).

[viii] http://fortune.com/2016/04/17/toyota-earthquake-disruptions/

[ix] https://www.reuters.com/article/us-toyota/toyota-aims-for-quake-proof-supply-chain-idUSTRE7852RF20110906

[x] https://af.reuters.com/article/worldNews/idAFKCN0XD0B4

[xi] http://www.autonews.com/article/20160425/OEM/304259956/how-toyota-applied-the-lessons-of-2011-quake

[xii] Chopra, Sunil, and ManMohan S. Sodhi. “Reducing the risk of supply chain disruptions.” MIT Sloan Management Review 55.3 (2014): 73.

 

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4 thoughts on “The last dance of Just-in-Time?

  1. Giovanni – this is a fascinating article. I had no idea how much these natural disasters adversely affected Toyota’s production capabilities. I also found the company’s action plan to be ingenious. More broadly, your question about the future viability of just-in-time is extremely interesting. Do you think that this is a unique situation given Toyota’s increased exposure to natural disasters or do you think that other companies will adjust their production systems to account for these events? Are there any other types of events, outside of natural disasters, that could cause companies to adjust their just-in-time processes?

  2. This was quite an interesting article. We are so blinded by the cost benefits that we forget to consider a scenario of unforeseen risks such as an earthquake. I will be curious to know where does one draw the line between hedging a risk such as this (probability of 9% occurrence in 50 years) VS being cost-efficient?

    Also, I realized that not only Japan but there are a lot of other major cities which are on the active plate tectonic belt (such as Hawaii, Los Angeles, San Francisco etc.) – and can experience a similar scale of an earthquake in future. Since the damage caused by such an event is unforeseeable and unpredictable how can companies operating in such locations make contingencies to address these issues?

  3. Giovanni: Thanks for the great read! To echo George, in classic Toyota fashion, I found their reaction to the problem to be ingenious.

    However, Khush’s comments got me thinking about previous natural disasters that had significant economic impact. Do you think Toyota researched these companies to use as a benchmark to see how they responded after their respective natural disasters?

    Two disasters immediately come to mind:

    *2004 Indian Ocean Earthquake flattened Indonesia and Thailand (http://www.bbc.com/news/world-asia-30034501)

    *2005 Hurricane Katrina demolished southeast United States (http://www.cnn.com/2013/08/23/us/hurricane-katrina-statistics-fast-facts/index.html & http://ww2.cfo.com/accounting-tax/2005/09/supply-chains-in-katrinas-wake/)

    Since I am most familiar with Hurricane Katrina, let me use this as an example: I know that the surrounding areas of New Orleans are loaded with boat manufactures (good benchmark for a car manufacturer). In fact, several boats that I served on in the military were built in Lockport, Louisiana at Bollinger Shipyards. This is a small example, but hundreds of companies were upended by this hurricane. I wonder if Toyota reinvented the wheel with the response you mentioned or if they did their homework and benchmarked appropriately? I think the Hurricane Katrina supply-chain impact is especially relevant for Toyota because New Orleans was AGAIN hit hard several years later by Hurricane Ike (2008) and Hurricane Ida (2009). Did the adjustments at Bollinger Shipyard (and other companies) withstand the follow-on hurricanes they faced? If so, they could be the perfect benchmarks for Toyota to use.

    Great article, thanks Gio!

  4. Giovanni, thanks for sharing this well-written essay on Toyota. I was initially planning to write on the same topic & the same company indeed. Although the cases we studied in TOM this semester have predominately praised the wisdom of Just-in-Time delivery, I have remained a little skeptical for precisely the same reason discussed in your essay – how can companies ensure timely delivery of products when extreme and disruptive events such as earthquakes occur? And would shifting from one-single supplier to multiple ones that’d produce identical parts really help mitigate the climate change risks on Toyota’s supply chain management? If it does, how big a change should the company make to its supply chain in order to find the right balance between timely delivery and cost saving? I’d be eager to learn more.

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