Supply chain disruption caused by the Covid-19 pandemic has become a major headache for manufacturers around the world. Nowhere was this felt more acutely than in the auto industry, which faced acute shortages of semiconductor chips and other components. This led many to argue that just-in-time and lean manufacturing methods were dead and being superseded by “just-in-case” stockpiles of more inventory.
Still, Toyota, the pioneer of the lean concept, fared better than most of its competitors and overtook General Motors to become the top seller in North America in 2021. People watched the company continue to drive vehicles and concluded that it must have gone back on its principles of minimum inventory and a tight 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 ability to accommodate disruptions.
“Actually, TPS [the Toyota Production System] It really allowed us to do what we did,” Toyota North America executive vice president Chris Nielsen told me. Nielsen oversees quality and demand/supply management and has navigated numerous hurdles over the past two years. In this article, Nielsen and Jamie Bonini, president of the Toyota Production Systems Support Center (TSSC), share insights into how TPS has evolved and continues to adapt to a changing world.
Lean does not mean zero inventory.
Toyota takes a strategic approach to inventory planning. Operationally it stands on three legs: strategically sized inventory in the right location to act as a buffer to meet changing demand, safety stock that accounts for the risk of disruption, and a narrow view of lead times. It noted that the company had learned a lot from the 2011 Tohoku earthquake and tsunami, after which it identified areas that were vulnerable to disruption and, as a result, were candidates for stockpiling. The key is how Toyota factors time into its inventory planning.
Lead time is the delay between ordering a part and receiving it. Traditionally, this may include the time to procure raw materials, manufacture the part, and then deliver it. After the earthquake, the company became deeply involved in restoring production at the Renesas Semiconductor fab in Naka, Japan, a key supplier of automotive microcontrollers taken offline. While it helped rebuild the facility, the company learned a lot about the fragility of the chip manufacturing process and the location of many of the world’s most important chip manufacturing 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 concept of lead time, first in semiconductors,” Nielsen explained. So a decade earlier than other automakers, it realized it had to carry a much larger inventory of semiconductor chips.
Lead time and appropriate inventory planning are affected 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 soon as the car bodies leave the paint shop, an order is sent to the seat supplier who is less than an hour away. The supplier manufactures the correct color and model seats and delivers them to the assembly line in the correct order several hours later. Because the seats are installed near the end of the line, lead times 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 were initially installed far ahead of the line, so the seat supplier was located 10 yards from the final assembly line because lead times were under about 20 minutes. In the short term, the same amount of inventory maintained at the Kentucky plant was neither necessary nor appropriate. As the line design subsequently evolved, the lead time requirements changed with it.
The range of inventory carried can vary considerably. The company maintains a 13-week steel coil inventory in Georgetown because it uses a custom alloy that is manufactured in batches. “Many people have the misconception that TPS is against having inventory; That’s not right,” Nielsen said. During the winter months, the company increases parts inventory by one shift price to reflect the inevitability of ice storms or winter weather that will affect logistics networks. Once the winter is over, it adjusts the amount again.
Multiple suppliers are sources of resilient capacity.
Many companies see dual sourcing primarily as a way to reduce costs by having suppliers compete in bidding wars. But Toyota takes a different view: having two suppliers means it can enjoy resilience.
It may also source a steering wheel from one supplier exclusively for one model family and a steering wheel for another from a second supplier. The two suppliers will continue to compete for the next design as new models enter production, but they will compete more on innovation and capability than on price. The cost must be reasonable, and suppliers know that 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 a competition to make you better.” The company wants its suppliers to be profitable so they can invest in new technology and better designs; It knows that it will benefit.
“For suppliers to invest in their people, in their facilities, in their technology development, they need to know they’re going to be in business tomorrow,” Nielsen said. “So one of the things we emphasize is stability in the supply base. Competitive advantage is long term. A lot of it is around technology and design.”
Supplier relationships are based on trust.
Trust and supplier support are core principles of TPS. This means relationships should be built around long-term partnerships and not transactional in nature.
When a supplier encounters a problem, Toyota offers to help them solve it and they are willing to accept it. “Our supplier partners open the door for us and say, ‘Look, we know you’re not going to punish us for something we’ve done wrong, and you’re here to help, you’re part of the team,'” said Bonini, of the Toyota Production Systems Support Center. President, told me.
When Bonini worked in a supplier development department, he was one of many people at Toyota who went to help these suppliers when they were struggling with production problems, especially in high-risk situations involving the introduction of new technology. He often spends weeks solving suppliers’ problems, building trust in the process.
“If you’re really going to run the system in a tight time frame, you have to have the ability to go to a supplier and help when there’s a problem, as well as a trusted relationship,” Bonini said. “If a supplier runs into a real problem, we have people who can jump in, with technical expertise to really help solve the problem. We do not enter to audit their recovery plans; We roll up our sleeves and help problem-solve as part of a collaborative effort.”
Thus, when a supplier problem threatens to disrupt Toyota’s production, Toyota gives the matter its attention. It partners with the supplier to resolve the issue quickly.
TPS is an educational system.
The biggest thing most people overlook about TPS is that it is a system designed for learning. This focus on learning and continuous improvement occurs at multiple levels. On the shop floor, frontline problem-solving skills are emphasized. It is supported by a hierarchy of team and group leaders with greater expertise and teaching ability. Many people who see the Toyota car assembly line see the number of layers as inefficient, but the reality is the opposite. Rapid problem-solving drives improvements and enables tight just-in-time systems to operate efficiently. So the staffing more than pays for itself.
Extend supplier support in addition to learning. As Toyota invests efforts to help suppliers solve problems, it also learns their production processes. Then, the next time a problem comes up, it’s better able to help. And because it often works with suppliers two to three years before new product launches, it is well-positioned to help with start-up problems.
Bonini explains: “We can help them with the design, and we can make their design more manufacturable or optimize it. Then if there’s a problem at launch, we have a quality problem, or we have an engineering change, we have a meeting with the supplier. There is trust and we know the process. Collaboration is key.”
Not only will the supplier’s processes be stronger at the outset, what Toyota learns will deepen its understanding as future issues arise. This will lead to faster solutions and faster development of alternatives when needed.
TPS is an organizational culture.
The Toyota Production System is as much an organizational culture as it is a factory operating system. Its core philosophy — to inspire and develop people so they can solve problems quickly and build a culture of continuous improvement — obviously extends beyond the company’s own walls to include its suppliers.
And suppliers report that their relationship with Toyota is different from other customers, which is clearly valuable when problems arise. That helps explain why the company weathered the supply chain disruptions of the past few years better than most, even as it continues to learn and evolve.
Like any culture, Toyota’s culture is deeply rooted in values. This means that if you really want to take advantage of a company’s operating system, it’s not enough to just copy lean and timely tools. You have to start with values and beliefs. This makes it more difficult to replicate, even though the benefits are obvious.