What Toyota’s Latest Supply Risk Event Teaches Us

Toyota supply chain Rainer Plendl/Adobe Stock

Toyota's supply chain is much revered for its lean Toyota Production System that it deploys internally and at its suppliers. It does help drive out waste and improve product quality. Yet it’s “necessary but not sufficient” in running an end-to-end supply chain. This was evidenced by several recent events.

Most recently, Toyota faced the threat of production line shutdowns in Japan due to a fire at an Aichi Corp. steel plant, which, given the incident occurred back on Jan. 8, makes the potential shutdown all the more shocking to hear. This last summer, Toyota was impacted by Takata-supplied air bags shooting steel shards into passengers upon deployment — not good. And of course, the 2011 tsunami that prompted a major supply chain risk initiative to help derisk the supply chain through reduced time to recovery (TTR) from months down to a few weeks.

What’s interesting is that in this Reuters article, Toyota defended its overall supply chain design regarding locally sourced materials, with the only cited exception being steel sourced from South Korea. In this most recent case, it’ll be interesting to see how well alternative steel supply sources can be tapped in the short term. (On our sister site MetalMiner, Steel Manufacturers Association President Philip Bell pointed out, “If Japan would open its markets to more U.S. SBQ suppliers, such situations could be mitigated.”)

5 Supply Risk Lessons, Courtesy of Toyota/Aichi

Longer-term, there are some interesting and nuanced lessons to be gleaned from this latest problem:

  • Have a supply network model that captures the reality of your supply chain. Toyota learned about part dependencies the hard way back in 1997, when a fire at supplier Aisin Seiki knocked out supply of Toyota brake valves, leading to non-production of 70,000 Camrys. But, in this case, it wasn’t just a tier 3 or tier 4 supplier; rather, the supplier was Toyota itself. (Aichi is a Toyota subsidiary.) And since Toyota, like Honda, also operates a trading arm to execute buy-sell arrangements with upstream suppliers, the supply chain network models truly look like networks rather than chains. Once you have an extended supply network model, then you can run much more supply network design scenarios beyond the usual analytics run by supply network design tools (aka where to put the warehouses and whatnot).
  • Take a fresh look at your supply risk mitigations. For example, just applying a Toyota trisourcing 60/20/20 approach may offer some company-level hedging, but if they’re all in Japan, that wouldn’t mitigate country-level risk (i.e., natural hazard risk to that country). In a supply risk mitigation program, you have to model your risk types broadly and robustly (e.g., scenario planning against those risks), before picking any one historical hedging approach. And speaking of hedging…
  • Consider modeling internal supply sources as suppliers. Some companies will look at internal plants (or shared service centers) alongside suppliers. Conducting rigorous make vs. buy analyses is critical on both risk and reward dimensions. For example, a few paper products manufacturers own forests to have vertically integrated supply chains as a hedge. But if you get too integrated, whether in the physical supply portfolio or in financial portfolio (e.g., keiretsus), you’re actually working against the risk mitigation principles that hedging (broadly) are all about.
  • Work with suppliers (internal ones, too) on more robust design. One way to mitigate sole sourcing is to improve the robustness of design to accommodate supply variation that uneconomically favors a supplier. In other words, design out any “unobtanium” parts and materials that lock you into a supplier — unless the feature is a truly customer-differentiating or strategic capability. In this latest Toyota case, having alternate steel supplier sources that can support the steel requirements met by Aichi will help get those sources ramped up to meet production volumes.
  • Use technology. You didn’t think we’d leave this out, did you? Obviously there’s only so much you can do with predictive analytics to predict risks, but supply risk management technology goes far beyond simple risk type modeling and big data mining. In the supply chain, it actually becomes a mashup of extended supply network design, market intelligence, supply planning, compliance management and business continuity support. In fact, we have two sessions dedicated to supply risk at our upcoming Global Procurement Tech Summit with ISM that delve into these areas.

Back to the Alternative Supply Sources

There are two other points worth mentioning. That tri-source arrangement? We’d expect that the alternative sources would both be “PPAP-ed” as part of any risk management strategy. After all, the raw material of the parts in question is a steel bar, not a rocket launcher. Though the steel undoubtedly is processed into a more refined semi-finished product, we can’t think of any reason why at least one, if not two, other suppliers would not be ramped up and ready to go from the sidelines.

The keiretsu business model makes perfect sense and understandably works, but some basic tradeoff scenario analysis should have dictated that the tri-sourcing strategy trump what appears to be a sole-source decision. Proof will come Feb. 6 when we see whether Toyota actually shuts down its production line — which would prove to be a very painful mishap for the networked supply chain.

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