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