Problem: Supply-Chain Challenges

in Post-Earthquake Japan

Japanese automakers have long been known for the quality of their products, and especially for the efficiency of their stream-lined manufacturing and supply processes. Thus, few people could have predicted how severely the destructive earthquake and tsunami that struck Japan in March 2011 would disrupt the country's entire auto industry. Matters were further compli-cated by the damage the quake and floodwaters caused to one of Japan's nuclear power plants, interrupting power supplies around the country and creating a dangerous radiation zone for miles around the plant.

Following the quake and ensuing floods, most automotive factories in Japan were closed for at least several weeks, bring-ing to a halt about 13% of worldwide auto production. Toyota, Honda, and Mazda shut down many of their parts and manu-facturing plants in Japan, and Toyota also announced plans to

suspend production in at least one North American plant be-cause of parts shortages. The company said it would make plant improvements and run training programs in its other U.S. facil-ities while the assembly lines were idle or run operations on a part -time basis to conserve its parts inventory. Honda, Nissan, and Subaru also reduced their North American output as they anticipated and tried to deal with expected parts shortages.

Since one of the guiding principles of Lean production is to keep parts inventories as low as possible, it wasn't long before these shortages occurred. "The supply chain in the automotive industry is so fragile," said one legal advisor to the global auto industry. "It's based on just-in-time principles, where you don't have a lot of inventories built up, so you leave yourself without much margin for error when a supply interruption happens."

Industry observers predicted that about half of Japan's auto capacity would remain closed for at least eight weeks after the disaster, which would eventually put about one -third of world-wide production in jeopardy, as the effects of parts shortages made themselves increasingly felt in manufacturing facilities far from Japan. One auto industry research firm predicted that about five million cars that the industry had expected to sell in 2011 would never be made.The disaster zone in Kesennuma, Miyagi prefecture, 100 days after a mas-sive 9.0-magnitude earthquake and tsunami devastated the northeastern coast of Japan.

By spring and summer 2011, in fact, U.S. auto dealers were reporting what one called "a lot of emptiness" in their show-rooms. Many logged dwindling sales as supplies fell to as little as one- fifth their normal levels, and popular cars such as the Honda Civic and Accord went out of stock. Without new cars to sell, even trade- in sales were slowing. Honda posted a 27% decline in sales for August 2011, and Toyota anticipated a dra-matic 31% profit decline for the year. Although the Japanese auto industry worked hard to quickly return to full capacity, output was still not fully restored some six months after the di-saster. The disaster's long-lasting ripple effects thus motivated industry executives to consider some changes in their vaunted manufacturing and supply operations. Traditionally, Toyota had used a single source for many parts that were common to more than one of its car models. Although the company locally sources about 85% to 90% of parts and materials needed for its North American manufacturing operations, a strategy that should make it less vulnerable to supply interruptions in Japan, it actually builds a larger proportion of its vehicles in Japan than do the other automakers, so the 2011 disaster was a seri-ous blow.

In response to these problems, Toyota's management be-gan work to "foolproof " the supply chain so that it could re-cover from major interruptions in as little as two weeks. The plan had three parts. First, Toyota would increase standard-ization of auto parts so all Japanese carmakers could share the supply. These parts would be made in several locations to ensure uninterrupted supply. Next, the company asked its upstream suppliers of highly specialized parts, or parts that are sourced from only one location, to hold larger inventories than they had been carrying, as and opened up new options for manufacturing such parts to reduce its dependence on single sources. Finally, and perhaps most ambitiously, Toyota took steps to make each of its global regions independent of the others in terms of parts supply, so supply chain disrup-tions in one area will not spill over into the operations of any other areas.

Questions

1. What are some of the advantages of the supply chain used in the Japanese auto industry before the March 2011 earth-quake and tsunami? What were some of its disadvantages?

2. Is Toyota's plan for a "foolproof " supply chain consistent with the Lean production philosophy? Explain.

3. Can you think of any additional ways Toyota (and its competitors in the Japanese auto industry) can improve upon the company's plan to create a "foolproof " supply chain?

4. What impact do you think Toyota's plan will have on the way it handles relationship management in its supply chain?