The global shortage of microchips for automobiles just keeps going on and on, with no end in sight anytime soon to how this unprecedented supply-chain disaster is cratering vehicle sales in the U.S. and elsewhere. It’s upending both new- and used-car markets, fundamentally changing the car-purchase and -ownership experiences, and sustaining a huge drag on an American economy that really doesn’t need extra stresses these days.
But if there’s one thing the auto industry’s terrible supply-chain problems are proving, it’s that the undisputed leader in logistics and inventory management is demonstrating the value of having that crown. Toyota and other Japanese automakers invented “just-in-time” inventory management and kanban, and created a worldwide industry standard with the philosophy. Toyota extended its leadership with the Toyota Production System for manufacturing excellence that has been copied by hundreds of companies in many industries.
And now, said one of the world’s foremost experts on Toyota’s system, the microchip crisis is underscoring the superiority of the Toyota way. Rather than trying to beef up inventories to mitigate the chip shortage, and abandoning just-in-time for “just in case” or some other contingent approach for addressing the challenge du jour, Toyota is pressing on with the conviction that its supply chain is faring better than rivals because it is maintaining the consistent strategy it has used for decades.
“Their [supply-chain] principles are timeless, from their point of view,” Jeff Liker, a University of Michigan professor, consultant, and author of The Toyota Way told the Chief Executive Smart Manufacturing Summit in Detroit last month. “They don’t change them often or quickly to deal with specific problems. This is the Toyota way, not your way, and not the ‘lean way.’
“Their general philosophy is to develop standards for normal operating procedures and respond to specific disruptions on a one-off basis, then reflect and learn lessons from that major crisis that then become part of their normal operating procedures.”
Liker said that any manufacturer can learn from Toyota’s principles. “Supply-chain management is about continually learning to work together ever better for the customer,” he said. “If you want to improve your supply chain from this model, you have to partner with various entities because you have to learn together. You, as a customer, can’t control anything. It requires interdependence. You need to learn to solve problems and improve together. That’s the ultimate vision.”
In Toyota’s approach, Liker explained, “supplier partnering is a system of management for just-in-time. It’s based on fair and honorable business relations; next-layer-up, stable, reliable processes; then clear expectations; then enabling systems; then learning enterprise. That’s at the top of the pyramid of need satisfaction, like Maslow’s need hierarchy” for human psychology.
The vision behind Kanban is to “strive for the right part, at the right time, in the right amount,” Liker said. “Toyota levels this out for a consistent tack toward customer demand. There are standard material-handling routes in the plant and standard [expectations] of suppliers who are responding to standard pull signals.”
To remain a trusted part of Toyota’s system, he said, suppliers “must have the ability to build in the sequence they’re getting from Toyota. They must know the proportion” of versions of a particular model that are being built “so they have an idea of what inventory they need. And they are totally integrated [with Toyota production], which is usually pulling from their suppliers’ parts.”
The just-in-time system is rigidly enforced at the top of the supplier pyramid and allowed more slack the further a supplier is from the assembly-plant apex.
“System suppliers are integrated and tightly connected with little inventory” to the Toyota operation, Liker said. “Rookie or troubled suppliers are monitored and may be asked to hold more inventory. And basic parts or material suppliers, that build in batches for multiple customer, ship to inventory buffers [which are then] metered out to Toyota.”
It isn’t as if Toyota didn’t lean into the challenge of microchip supplies over the years, before the current supply crisis. In the wake of the earthquake and tsunami that hit Honshu, Japan, in 2011, and greatly disrupted Toyota’s production, Liker said, the company developed a “just-in-case inventory of chip supplies, because they worked specifically with chip suppliers. They also got to know suppliers directly at the second and third tiers and asked [these] suppliers to stockpile months of chips, and compensated them. Toyota also identified separate chip sources in different geographic areas.”
As a result, Liker said, Toyota has fared best of any global automaker in responding to the chip shortage of the last couple of years, among other things nabbing the U.S. market-share lead for a time — for the first time. Profits have declined, he noted, but still are on track for an industry record.
Yet, Liker stressed, Toyota’s just-in-time philosophy “hasn’t changed” through all of this. In fact, its response to chip-supply problems illustrates the fact.
The company’s strategy, he explained, is “to develop standards for normal operating procedures and respond to specific disruptions on a one-off basis, and then reflect and learn lessons from that major crisis that then become part of your new normal operating procedure. But the basic principles of just-in-time don’t go away. You just have to decide what you need to modify based on what you’ve learned from the crisis.”