Toyota: Rebuilding and Fortifying a Global Supply Chain (Part 2)

Please click here for Part 1 of this post.

The third and final (public) step that Toyota is taking to reduce supply risk following March's earthquake and Tsunami is, as Reuter's suggests, to become "more resilient" by making "each region independent in its parts procurement so that a disaster in Japan would not affect production overseas." While reducing supply risk at the same time, Toyota's purchasing head notes that such a move would "also help offset losses from the strong yen by eventually lowering costs and creating a natural hedge -- whereby costs and revenues are in the same currency -- cutting foreign exchange exposure within regions." Sounds sophisticated. Buying where you sell is always a natural currency hedge -- and one with no financial cost. But this is what many world-class industrial supply chain organizations have been doing for some time. Toyota, once again, is behind some of its American and German OEM counterparts in pursuing such a move.

Curiously, in its risk reduction plans, Toyota does not appear to be heading down a path of opening up its own domestic operations to global sources of supply. Sasaki suggests that such a move "would not help in light of the time and money required to package and transport the parts, coupled with a higher level of manufacturing efficiency in Japan." Yet as we know, efficiency and cost are only two elements of the total cost of production, factoring in a range of supply risk factors. Most likely, one of the real motives behind this is that Toyota does not want to upset its supplier partnerships in Japan by opening up its supply chain to new partners. Arguing that global suppliers are less efficient is in fact a ridiculous argument. I've personally toured a relatively new domestic tier one facility that is capable of producing emissions canisters and other assemblies as efficiently as any operation in Japan (this supplier also provides parts to Japanese OEMs with production facilities in the US).

In summarizing and analyzing Toyota's three-step plan to reduce supply risk, Spend Matters would suggest the planned effort:

  • Moves slowly (and some might argue too conservatively) over a half-decade period
  • Focuses on activities (e.g., reducing dependence on a single region for materials) that should have been done long before the earthquake
  • Maintains supply chain sacred cows (e.g., granting special privilege to domestic Japanese suppliers)
  • Relies too much on physical inventory as a hedge against future disasters

In short, Toyota has thought small and conservatively in its attempt to reduce supply chain risk in the future. What additional plans should have Toyota pursued? Stay tuned as we offer up our own opinion in the final post in this series.

Jason Busch

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