We have been catching-up on articles and blogosphere commentary published while we were away on vacation for a week, and the Spend Matters blog alerted to a recent Reuters article, Toyota aims for a quake-proof supply chain.  The article should capture our reader’s interest because it outlines the action steps automaker Toyota is now undertaking as a result of its experiences from the devastating earthquake and tsunami that impacted northern Japan in March.

We have our own observations to share regarding the Toyota actions outlined.

First, readers should note the target set by Toyota- the ability to recover from any future earthquake within two weeks-time. That is a bold objective, and Toyota should be praised for setting such an objective, but we also opine that a five year timeline seems too conservative. Also note that Shinichi Sasaki, Toyota’s Executive Vice President, who is in charge of Purchasing, has assumed leadership for this initiative.  Too often these days, the overall leadership and accountability for supply chain risk management initiatives are unclear, and procurement seems to be reluctant to take on such functional-wide leadership.  The reasons are many, but suffice to state, if there is one very important takeaway from the Japan incident is that our supply chain community needs to step-up to active accountability for driving a supply chain risk identification and risk mitigation plan. It can be procurement, supply chain operations or product management, but the message is some group needs to lead, and not after a major incident occurs, when the bottom-line has suffered.

Toyota outlines three components to its risk management plan. They include some standardization of certain parts across Japanese automakers, especially those parts that have risks to revenue and production disruption.  We believe that every supply chain organization should identify components at-risk if major disruption occurs.  The open question for Toyota is whether other resident Japanese automakers are open to cross-company collaboration.  We believe that they are.

A second component is to influence lower-tier suppliers to hold more safety stock, perhaps a few months’ worth, for specialized components that cannot be standardized.  The article notes that this is to avoid a repeat of the current major shortages of microchip controller units (MCU’s) which were produced by Renesas Electronics Corp, who is still striving to resume full production.  While some of our readers would scoff at a strategy of encouraging more safety stock, the Japan earthquake brings more awareness to the identification of parts at risk. We share the viewpoint of Spend Matters that an important open question is whether Toyota’s and other automaker have the willingness to adequately compensate suppliers for this added stock. We believe it is smart strategy, and cost should be the least of concern.  Another important consideration is where to store this safety stock, since spreading the locations across non-earthquake prone regions may insure that inventory is not at risk if a particular region is severely impacted by damage.

The third component is ever bolder and has supply chain strategic and political implications.  It calls for each geographic region to have an independent key supply strategy, so that a future major earthquake in Japan or other geographies would not severely impact production across all regions.  Readers may recall that in the March incident, Toyota’s North American and European production operations were additional impacted with production interruptions or slowdowns.  Since 90 percent of North America supply is currently sourced locally, the strategic implication is that Toyota is now considering the sourcing of engines and transmissions in the local onshore region.  This will be an important boost to North America’s auto supply chain and its supplier network.

We do not share the Spend Matters viewpoint that Toyota was “the poster child for lackluster supply risk planning coming out of this year’s earthquake and disaster.”  That label is perhaps too harsh and could apply to many Japanese and non-Japanese manufacturers.  Multiple Japan based automakers have suffered financially from the effects of this disaster while others have benefiited. Supply Chain Matters has previously cited Toyota for its candid supply chain impact communications during and after the Japan crisis, even though the messages changed constantly.  Other Japan based manufacturers were not as candid and open with customers.  The reality was that many manufacturers did not really know initially what the impacts would be, but soon found out. Manufacturers were very fortunate that their supply chain teams rose to the challenge and worked yeoman hours to fully assess parts impacts and institute recovery plans in unheard of times.

Other criticism of Toyota as using the earthquake as an excuse to become a global company belies the reality that Toyota has been a pioneer in global presence and was one of the first foreign manufacturers to invest in North America and Europe many years ago, and continues to have a global supply chain and distribution footprint. Toyota certainly has corporate cultural and supply chain faults and has paid the price in a hit to its reputation and global market share  ranking in the market. Our community perspective should be praise for many ongoing proactive actions to address previous oversights and communication lags.

Let us not overlook the political considerations of one Japanese company, who in spite of many economic and currency indicators to the contrary, is trying to maintain some open commitment to a manufacturing and jobs presence in Japan, while others like Sony are moving offshore. In today’s uncertain economic and political climate, that is an important consideration.  Do readers really believe that a Chinese or North American company is any different?

Let us  also keep the dialogue continuing since every supply chain organization needs to understand what the Japan earthquake and tsunami has provided as a learning event. Consider that as this commentary appears, roughly six month post incident, some Japanese companies are still in the process of resuming full production operations.

What happened in Japan was a watershed event for global supply chains, and will continue to be our ongoing case study in proactive supply chain risk management.

Bob Ferrari