When production came to a screeching halt at 14 Toyota assembly plants last month, the automobile industry took notice. A fault in the parts order management system was the reason production could no longer be procured. It’s
a surprising setback given that Toyota is renowned for its "just-in-time" (JiT) principle, stemming from the
Toyota Production System (TPS), initiated by Kiichiro Toyoda.
Let’s take a closer look at what went wrong and lessons learned.
Just-in-Time no longer up-to-date?
Today's global supply chains rely heavily on the just-in-time (JiT)principle, where production and transport plans are meticulously synchronized. This involves ordering materials to arrive precisely when needed for manufacturing, and shipping finished products promptly to meet customer demand, effectively reducing storage costs.
However, the success of this JiT approach hinges on the timely delivery of all goods, components, or materials, which hasn't been the case since the pandemic outbreak. The global supply chain fell out of sync, causing significant disruptions.
For instance, the
delayed delivery of chips, crucial for many cars, created bottlenecks in the automotive industry. These disruptions persist, leading to production stoppages and, in the worst scenario, financial strain on companies.
These experiences and recurring supply shortages, such as the recent incident at Toyota or the
drought-related water shortage in the Panama Canal, are causing many companies to question the JiT production model that has been established for years and to rethink it in the interest of greater safety, especially because of supply shortages.
Safety versus costs - is it really that simple?
In order to be able to react quickly and at short notice in the event of supply bottlenecks, many companies are now going back to building up a larger safety stock and reintroducing "
just-in-case" (JiC) production.
To mitigate supply issues, particularly when essential materials originate from a single source like China, the concept involves maintaining a larger safety stock. This approach reduces risks but escalates storage costs, tying up more capital.
To ensure the availability of the correct products in the right places, employing inventory optimization strategies is recommended. These methods determine the appropriate quantities of finished goods, intermediates, and raw materials for each location, potentially resulting in higher stock levels for some items and lower levels for others.
Diversification and regionalization
Companies aim to reduce reliance on single suppliers by diversifying their supplier base, enabling quicker pivots to alternative partners during delivery issues. Global crises have highlighted benefits in outsourcing activities to nearby partners, including shared time zones, physical proximity, and cultural alignment, fostering improved collaboration while promoting sustainability through reduced travel distances.
However, companies should also keep in mind that splitting the order among multiple suppliers can preclude volume discounts and add additional burdens to the procurement process, such as triggering multiple purchase orders, which in turn is prone to errors.
End-to-end visibility across the supply chain
To enhance
supply chain resilience, transparency is crucial. This involves sharing information with partners regarding supply and demand fluctuations, capacity constraints, and sustainability data like emissions, waste, and employee well-being.
However, it has been shown in the past that a well-established JiT model strengthens
relationships between companies and suppliers, enabling them to respond quickly to supply chain disruptions. In this way, they can not only minimize risks, but also work together to build a sustainable supply chain.
A simple return to the JiT model with low inventory levels as before the pandemic is unlikely to happen anytime soon. If companies can leverage the benefits of the JiT model along with a well-designed and resilient supply chain, then they stand a good chance of being well prepared for future disruptions.
For more information on how to avoid risk by building visibility and collaboration into supply chain planning, simply download the latest Oxford Economics Research.
