Toyota’s Post Crisis Supply Chain Transformation: Lessons in Resilience

The crisis hits

On March 11, 2011, Japan was struck by one of the worst natural disasters in its history. An earthquake and a tsunami claimed the lives of over 10,000 people. It destroyed farmlands, homes and infrastructure. The disaster caused the destruction of many parts of the Tōhoku region where many of Toyota’s suppliers were based.

The impact on Toyota’s supply chain

Toyota, Japan’s leading automobile maker, was severely affected. As expected, the disaster crippled Toyota’s supply chain and its processes. The operations of many factories were

interrupted due to inadequate production materials causing a decrease in production by 78% year-over-year in April 2011 as a result. The disaster impacted the production of over 150,000 vehicles. After the earthquake, Toyota’s Japanese plants were closed for almost 2 months. Toyota also reported an $86.8 billion profit decline from the January to March period compared to the year prior.

Toyota quickly began a recovery operation targeting facilities and infrastructure that had been impacted by the earthquake. They also provided aid to their suppliers to help them resume production as quickly as they could. It prioritized employee safety and provided the necessary support to those who were directly affected. They also maintained good relationship with their

stakeholders by regularly updating them on the situation at hand. It took 6 months for Toyota to return to its normal production levels.

Exposing the weakness of the JIT system

This disaster exposed key weaknesses in Toyota’s supply chain design. Toyota uses the Just-in- time system (JIT). Just in time is a single piece of a larger system called lean manufacturing

which emphasizes waste reduction in the production process. The origins of the Just in Time

system can be traced to Henry Ford’s production line however, Taiichi Ohno, famously known as the father of JIT adapted and implemented it into Toyota’s production system to handle smaller

batch sizes with the kanban system by the year 1962. The JIT is a pull system in which the

various stages of the production process are provided with the only the right quantity of items as and when they need them. In the pull system production is triggered by a customer’s order, each stage of the production process then decides the number of items it needs in contrast with the push system where production is based on the anticipation of demand. This is done to reduce inventory and associated cost. The Kanban system was a tool used to help implement the JIT

system. Kanban is Japanese for card. It was the use of visual cards to signal when to move or produce items. Toyota implements the JIT by keeping small quantities of production materials at

each stage of the production process to ensure that they have enough inventory to start production. These small quantities of inventory are replenished once they are used.

Due to Toyota’s reliance on the JIT system they were unable to meet production demand because of the widespread disruption the disaster had caused. The disaster disrupted their supplier

network resulting in the shortage of production materials. They were unable to keep up with production demand. The disaster exposed weakness inherent to Toyota’s supply chain strategy highlighting the need for resilience.

Toyota’s Redesign for excellence

Faced with the challenges the disaster brought upon them, Toyota began to take measures to restore production levels and increase the resilience of their supply chain.

Diversifying Sourcing: To reduce over-reliance on a single supplier, Toyota decided to diversify its sourcing and increase collaboration and communication with their suppliers.

Increased Inventory: Toyota also decided to increase inventory of essential parts for more production stability in times like these.

Increased Technological Investments: Toyota invested in technology to allow for real time

monitoring of their operations for faster response to potential risks. They employed the use of artificial intelligence and data analytics to predict potential risks and take preventive measures. They also employed the use of the digital twin technology. Using the NavVis 360 mapping device, they created a virtual simulation of their work environment. The technology allows them to

create scenarios and analyze their impact with ease avoiding significant costs and risk exposure.

Through these efforts, Toyota was able to emerge from the crisis with a much more resilient

supply chain and a refined supply chain strategy. Their supply chain was better suited to handle challenges. Their proactive approach during and after the disaster also increased stakeholder’s confidence.

Lessons for other businesses

The manner in which the disaster impacted Toyota and how they were able to bounce back on their feet serve as a lesson for other businesses and can be applied in many business contexts. Toyota’s case highlighted the importance of supply chain resilience especially in unpredictable and volatile environments.

Companies that employ the use of global supply chains in their operations must take cues from this case. Such companies that over rely on one geographic area for a particular supply chain

functions are exposed to risks such as this and it reduces their supply chain’s resilience. Rather, to strengthen the resilience of their supply chain, companies should avoid concentrating any key

supply chain function in a single geographic area and instead spread it across at least two regions whilst keeping in mind the different kinds of risks such as political and economic risks in doing so. This isn’t just to avoid the impact of the occurrence of a disaster like in Toyota’s case but to also significantly minimize other risks associated with the over reliance on a single geographic location for a specific function.

Although the JIT system has a lot of advantages, Toyota’s case also highlighted the tangible disadvantages that come with using the JIT system. Businesses that use the JIT system must

think of how they would respond if such an occurrence strikes. They must implement systems and checks to offset the disadvantages of using the JIT system. They can adopt the strategy Toyota used post crisis, that is increasing the level of inventory of essential components.

Another important aspect of supply chain management this incident highlighted was supply

chain visibility. Toyota’s case highlighted the importance of transparency in one’s supply chain so as to detect and take preventive measures against potentially disruptive solutions. Real time visibility on inventory levels, work-sites increases company’s ability to take preventive

measures.

Emerging stronger

Even after suffering such a major setback, Toyota showed grit by taking effective proactive

measures to protect lives and restore production levels; revamping its supply chain strategy for increased resilience. They also revised their business continuity plan to protect lives and maintain production levels in the event of a natural disaster.