The supply chain disruptions triggered by the Covid-19 pandemic caused major headaches for manufacturers around the world. Nowhere was this felt more acutely than in the auto industry, which faced severe shortages of semiconductor chips and other components. This led many people to argue that just-in-time and lean production methods were dead and being superseded by “just-in-case” stocking of more inventory.
Yet Toyota, the originator of lean concepts, fared better than most of its competitors and passed General Motors to become the top seller in North America in 2021. People watched the company continue to churn out vehicles and concluded that it must have turned its back on its principles of minimal inventories and a pull production system. But the truth was that its performance during the pandemic highlighted how less understood aspects of its system actually led to greater resilience and a better capacity to accommodate disruptions.
“In reality, TPS [the Toyota Production System] is really what allowed us to do as well as we did,” Chris Nielsen, executive vice president of Toyota North America, told me. Nielsen oversaw quality and demand/supply management and managed through numerous disruptions over the last two years. In this article, Nielsen and Jamie Bonini, the president of the Toyota Production System Support Center (TSSC), share insights on how TPS has evolved and continues to adapt in a changing world.
Lean doesn’t mean zero inventory.
Toyota takes a strategic approach to inventory planning. Operationally this stands on three legs: strategically sized inventories in the right locations to act as a buffer to meet changing demands, safety stock that factors in the risk of disruption, and a nuanced view of lead times. It has been pointed out that the company learned a great deal from the Tōhoku earthquake and tsunami of 2011, after which it identified parts vulnerable to disruption and, as a result, were candidates to be stockpiled. How Toyota factors lead times into its inventory planning is the key.
Lead time is the delay between ordering a part and receiving it. Traditionally, that can include the time to procure raw materials, produce the part, and then deliver it. After the earthquake, the company became deeply involved in the restoration of production at the Renesas semiconductor fab in Naka, Japan, the critical supplier of automotive microcontrollers that was taken offline. While it assisted in the rebuilding of the facility, the company learned a great deal about the fragility of the chip manufacturing process and the location of so much of the world’s critical chip production facilities in areas prone to natural disasters.
“With the increasing number of semiconductors used in our vehicles and the fragility of the system, we realized that we had to redefine our notion of lead time, first in semiconductors,” Nielsen explained. So a decade earlier than other automakers, it realized it needed to carry far more inventory of semiconductor chips.
Lead time and the appropriate inventory plans are influenced by usage rates and patterns. One of the most famous examples of just-in-time manufacturing is the seat-installation process at the company’s assembly facility in Georgetown, Kentucky. As vehicle bodies come out of the paint shop, an order is transmitted to the seat supplier who is less than an hour away. The supplier builds the correct color and model seats and delivers them in the correct sequence to the assembly line several hours later. Because the seats are installed near the end of the line, the lead time can be several hours, and the company maintains about two hours of inventory next to the assembly line. At the San Antonio plant, the seats initially were installed far earlier in the line, so the seat supplier was located 10 yards away from the final assembly line as the lead time was down to about 20 minutes. With a short lead time, the same amount of inventory as maintained in the Kentucky plant was neither necessary nor appropriate. As the line design subsequently evolved, the lead time requirement changed with it.
The range of inventory carried can vary considerably. The company maintains 13 weeks of steel coil inventory in Georgetown because it uses a custom alloy that is made in batches. “Many people have the mistaken impression that TPS is against having inventory; that’s not right,” Nielsen said. During the winter months, the company increases the amount of parts inventory on hand by one shift’s worth to reflect the inevitability of ice storms or winter weather that will affect logistics networks. Once the winter is over, it adjusts quantities back down.
Multiple suppliers are a source of resilient capabilities.
Many firms view dual sourcing primarily as a way to drive down costs by making suppliers compete in bidding wars. But Toyota takes a very different view: Having two suppliers means it can enjoy resilient capabilities.
It might source a steering wheel for one model family exclusively from one supplier and a steering wheel for another exclusively from a second supplier. The two suppliers would then compete constantly for the next design as new models enter production, but they would compete more on innovation and capabilities than on price. The cost has to be reasonable, and the suppliers know Toyota will have a good handle on what the cost needs to be.
“For us it’s not a bidding war,” Nielsen explained. “It’s competition to make you better.” The company wants its suppliers to be profitable so that they can invest in new technology and better designs; it knows that it will benefit.
“For suppliers to really invest in their people, in their facilities, in their technology development, they have to know that they’re going to have the business tomorrow,” Nielsen said. “So one of the things that we really emphasize is stability in the supply base. The benefit of competition is long term. A lot of it is around technology and design.”
Read More at https://hbr.org/2022/11/what-really-makes-toyotas-production-system-resilient