Just in Time production has its risks

Toyota's Just in Time production philosophy leaves it vulnerable to supplier problems.

Toyota's Just in Time production philosophy leaves it vulnerable to supplier problems.

Published Apr 22, 2016

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Tokyo, Japan - Toyota's close ties to its ‘keiretsu’ - or family of affiliates and suppliers - have helped it become the world's top automaker. But two major production stoppages this year highlight the risks, too.

The car maker's reliance on Aisin Seiki for door and engine parts forced Toyota to halt much of its production at virtually all its plants in Japan this week after an earthquake damaged Aisin plants in the south.

The stoppage follows another week-long production halt in February after a fire at another affiliate, Aichi Steel, and could cost Toyota as many as 90 000 vehicles and ¥30 billion yen (R3.9 billion) in profit, by some estimates.

Toyota says it will restart production at most of its assembly plants in Japan next week.

Toyota suspends Japanese production

Nonetheless, the two incidents at the two affiliates illustrate the delicate balance for manufacturers such as Toyota to disaster-proof the supply chain - a crucial part of the 'Just in Time' production system it pioneered more than half a century ago to improve efficiency and reduce wastage.

CLSA analyst Christopher Richter said: “Just in Time works when everything's running smoothly - but if you balance the cost of holding more inventory for however long you have between these disruptive events, it would probably be worth sticking with the system.”

And that's what Toyota is doing.

A company spokesman said: “The Just in Time system is to ensure we receive supply as we need and only in amounts required at the time. We have no plans to change this policy.

“It takes time to procure the 30 000 parts we need to produce each vehicle. Bringing all these parts together is a massive process, so we're always looking to strengthen our supply chain, but we're not considering changing the inventories we hold because of the recent earthquake.”

Ripple effect

Toyota says it needs to produce at least three million vehicles in Japan each year to keep its plants, and those of its suppliers, operating efficiently, while also making its product development arm competitive.

The Toyota spokesman said: “If this base were to crumble because we shifted too many operations overseas, we would lose our domestic manufacturing expertise.

Toyota has, though, pushed some of its core suppliers to find more customers so they don't over-rely on the 'keiretsu' at times of disruption.

About 62 percent of Aisin's sales now go to Toyota, down from 68 percent before the devastating 2011 earthquake and tsunami. Big, non-Toyota customers now include Volkswagen, Audi, Peugeot and Volvo.

But the sheer size of orders from Toyota - which gobbles up 90 percent of Aisin's Japanese-made door check straps - means any disruption at just one supplier can have a disproportionate domino effect across Toyota's production lines.

'Made in Japan'

Also, Toyota's 'Made-in-Japan' ethos carries risk when disaster strikes. Investors will have noted that while Toyota shut down in Japan because of quake damage to its supply chain, rival carmaker Nissan remained operational.

Nissan, and third-ranked Honda, make less than a fifth of their vehicles in Japan, having shifted more production overseas after 2011. Toyota produces 40 percent of its global output at home.

But for Toyota, which with its group companies employs more than 150 000 people in Japan, its status as the country's flagship company also carries a high responsibility and can come before maximising profits in the short term.

Nissan, and others, though, are changing tack to minimise the disruption from a seismically active domestic production base.

Nissan chief product specialist Masahide Amada explained: “We have implemented measures since 2011 so we are better equipped to deal with natural disasters. These include diversifying production capabilities and supply chains.”

Analysts said Nissan's plant in southern Japan avoided serious impact from the recent earthquake because it sources parts both in Japan and from South Korea and China.

Nissan declined to comment in detail on its supply chain, but Koichi Sugimoto, auto analyst at Mitsubishi UFJ Morgan Stanley Securities, revealed: “Nissan sources more parts from overseas than Toyota. This gives it a longer supply chain to avoid possible disruptions.”

Reuters

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