Toyota Crisis Management
Why would Toyota need to be concerned about crisis management when it has implemented processes throughout the supply chain that are synchronized and integrated to function like a fine Swiss clock? The reality is that Toyota is not immune to disruption of its operations because of natural disasters, strikes, fires, bankruptcies, and the like. Because of that vulnerability, Toyota has a process to respond to crisis situations.
But before we began with the discussion on how Toyota responds to crisis situations, let’s learn how a Japanese official reacted to a crisis situation. The following is a true personal story.
An example of contingency planning involves one of the authors’ visits with his family to the historic town of Koyasan in Japan. The rail ticket had been sold for two days, but because of a misunderstanding the return trip was scheduled after the first night, rather than after two nights as the family had planned. The Japan Rail official immediately realized the problem and wanted to create a solution that would hold whether the family traveled back the next day or the day after. He waited patiently for other lodging details to be finalized, and then he reprogrammed the ticketing system machines to recognize the return ticket for either day. He requested that the family merely inform the ticketing staff when they arrived and the programs would be activated so that the travel would be as if there was no issue with the tickets. In other words, plan B was as efficient as plan A. Such contingency planning is a hallmark of Toyota—plan B is as smooth as plan A.
Crisis Management Process
Unlike most of the Toyota operational process, crisis management is much less structured because the exact type and timing of a crisis event is unpredictable. In addition, there are two types of supply chain crises. The most obvious type of crisis is one that occurs as a result of an unplanned event such as a fire or natural disaster. However, Toyota also will declare a crisis situation to mobilize internal staff and suppliers to create a sense of urgency in order to develop a new technology that gains a competitive and/or strategic advantage. Such a situation is analogous to President Kennedy announcing in 1960 that the United States would send a man to the moon within 10 years. The development of the Toyota Prius was the result of one of these strategic crises.
The crisis management process consists of the following steps:
Identify the crisis. Identification of a crisis may seem to be a simple thing, because so many crisis events are also big media events (e.g., the terrorist attacks of September 11, 2001; earthquakes; and hurricanes). However, many crises are much less obvious, such as suppliers that are in financial trouble. Therefore, the responsibility to identify supply chain issues is not that of the purchasing group alone. It is also important to detect a potential crisis before the actual event occurs. The following are some of the ways that a crisis or potential crisis can be identified:
- The parts ordering group at a plant notices a pattern of short shipments
- The quality control group at a plant detects a sudden change in parts defects
- The purchasing buyer discovers during a periodic review of the supplier’s financial records that there has been a serious deterioration in the supplier’s finances that could lead to filing for bankruptcy
- The purchasing buyer becomes aware of a potential strike at a supplier
- News media report a natural disaster or terrorist attack
In the event that a supplier detects a problem first, then it is important that the supplier contacts purchasing or the plant to alert them of a problem. This step is crucial, because it is human nature to attempt to resolve the problem by one’s self. It is especially difficult for a supplier to admit that it has a problem. Therefore, Toyota’s purchasing management continually communicates to suppliers that Toyota wants to be alerted to all potential problems. Gene Tabor, general manager of purchasing at Toyota Engineering and Manufacturing North America, stated, “Call even if it is 5 p.m. Friday afternoon. Don’t try to solve the problem yourself over the weekend. We are here to help.”1 Gene claimed that “every supplier will have a problem; the question is how it is handled when it happens.” There are no extra staff resources to help suppliers; everyone from purchasing to the assembly line team members may be used to solve a supply chain problem. If a supplier has a financial issue and is required to wind down production, a team from Toyota will go to the supplier location and assist with production changes while at the same time ensuring that all OEMs receive a fair share of product. In addition, many times the subsuppliers to the supplier in trouble may be requested to continue to work closely with an alternate supplier so that shipments to Toyota can be continued.
Communicate! Both internal and external communications must be timely and effective. Initially, it is critical that all affected plants be alerted as well as sales organizations. Ongoing daily phone conferences need to be conducted to obtain the latest status and to share information. In addition, status reports must be e-mailed to all interested parties on a daily basis. External communication has to be managed to avoid misinformation being leaked to the media. Community leaders in the affected area must also be kept informed on a regular basis.
Make an assessment. Preliminary assessment determines the potential impact of the crisis. Questions that must be asked to probe the scope of the crisis include: “Which supplier or suppliers are impacted?” “What parts will be affected?” “What models and plants are affected?” Another aspect would be to assess the timing of the crisis. Has the crisis event already occurred (e.g., a fire or earthquake), or is it something that might happen in the future (e.g., a strike)? If the crisis can be anticipated, Toyota can get ahead of the curve by establishing the crisis team in advance to implement mitigating actions before the event occurs. For example, in the situation of a pending strike at a supplier, Toyota can build up inventory and/or establish an alternative supplier.
Assign “crisis owner.” An owner is assigned to manage each crisis across the enterprise and the supply chain. The crisis owner is determined based on the scope and type of the crisis. The following are some of the criteria used to determine the owner:
Scope. If the scope is limited to one plant, then the owner would most likely be a production control manager at the plant. On the other hand, if the crisis is worldwide, TMC headquarters in Japan might own and manage the crisis. Most crises fall in the middle. They impact multiple plants in one region and are the responsibility of the regional manufacturing headquarters.
Type. Once the entity responsible for the crisis has been determined, then it must be decided which function owns the crisis within the entity. The following are some examples: (1) Supplier financial and/or supplier employee relations issues would likely be assigned to purchasing, (2) parts shortages and/or supplier operation problems would be assigned to production control, and (3) parts quality issues would be assigned to quality. Even though who the owner is might vary, depending on the scope and type of crisis, all functions and entities will support the owner when and where necessary.
Assemble crisis team . There are two steps to assembling a crisis team. The first step is to identify the representatives from all of the parties affected. The representatives are the people who will be the focal points for each of the interested organizations. Toyota does not have extra staff to address crisis situations; therefore, the personnel assigned to work on the crisis must reprioritize their work and make necessary time to support the effort to mitigate the crisis. The second step is to gather together the on-theground team that is dispatched to the scene of the crisis. This team is the eyes and ears for the extended team and also provides direct support to resolve the problem. One of the principles of the Toyota Way is “Genchi Genbutsu,” which means “go and see.” This on-site team is able to provide the facts so that the crisis impact can be assessed and countermeasures can be developed. The team also provides technical assistance as needed.
Short-term mitigation. The immediate requirement is to implement countermeasures to minimize the impact. As stated above, the on-site team works to resolve the problem by providing technical support. The production control group works with the plant to ensure that parts continue to be delivered to the plants on time and in the quantity needed to avoid a disruption in production. The first step is to grasp the inventory of the affected parts at each plant as well of the parts in the pipeline. Then decisions are made to air-ship parts or obtain extra parts from another supplier. In the event there are not adequate parts to maintain production, then scheduled overtime will be reduced at each plant and, if necessary, production is stopped for the models that are slowest in demand. On another front, the purchasing group investigates the feasibility of establishing a new source for the parts. If the supplier has a relationship with a Japanese parent company, then it may be practical to obtain parts from the parent company in Japan on a temporary basis. With such parallel activities, Toyota proceeds with a sense of urgency on multiple fronts, even though in many cases the crisis is avoided or mitigated quickly.
Long-term mitigation. Even as the crisis team is involved in the day-today activities to mitigate the crisis, Toyota managers are using their problem-solving skills to investigate potential long-term countermeasures. The objective is to learn from the experience and to attempt to either avoid that type of crisis from recurring in the future or, if it is impractical to avoid, consider ways in which the impact could be reduced. For example, based on a particular experience, Toyota might decide to source parts to multiple suppliers or ensure that there is a backup source for critical parts.
Practice good corporate citizenship. Toyota practices its corporate citizenship principles even during times of crisis. Two examples are Toyota’s corporate donation to aid victims of a natural disaster and the company’s sense of fairness to its competitors when multiple automotive manufacturers are affected by the same supplier. Although the company may be deeply involved with assisting a supplier with recovery from a crisis, Toyota will make the best effort to see to it that each manufacturer receives its fair share of the supplier’s production.
Reflect. Toyota learns from a negative experience through reflection. After each crisis, a reflection report is prepared and shared throughout the organization. The report will include an analysis of the problem along with the short-term and long-term countermeasures. It also includes a reflection on what went right and what went wrong.
Toyota has reacted to several crisis situations—no two of them the same—in a number of ways. Even though Toyota is not immune to crises, the company’s ability to systematically manage them enables it not only to mitigate the impact of each crisis but also to strengthen the organization by learning from the experience.
Recovering from Disaster:The Aisin Seiki Story
How do suppliers benefit from being part of the Toyota network? The story of Toyota’s recovery from the fire at the Aisin Seiki plant provides an excellent example of how the supply chain reacted to a crisis. The story began at 4:18 a.m. on Saturday, February 1, 1997, when a fire erupted in the Aisin Seiki Kariya plant number 1. By 8:52 a.m., the lines devoted to P-valves and two other brake parts were completely destroyed. (The P-valve is a fairly standard product that was sourced solely to Aisin Seiki because of the supplier’s long partnership with Toyota and its quality standards, dedicated machinery, and the like. The P-valve is a small rectangular object that controls pressure on rear wheels, thus preventing skidding of the car.) The plant was responsible for delivering 32,500 P-valves to Toyota and other companies such as Mitsubishi, Isuzu, and Suzuki. Because of just-in-time delivery of parts to Toyota, only two to three days of inventory existed in the system. The fire on February 1 caused Toyota to start idling plants within two days.
Almost immediately, Aisin Seiki sprang into action. At 5:30 a.m. it decided to create an emergency response team that, later in the day, contacted all suppliers to ask for assistance in producing P-valves for Toyota. About 62 firms responded to this call for help. Among them were 22 of Aisin’s suppliers, Toyota itself, 36 of Toyota’s regular suppliers, and 4 nonregular suppliers, including a sewing machine manufacturer that had never made car parts. Because there were 100 different types of P-valves, Aisin had to decide which valves would be made at each of the available supplier locations.
The next day, drawings were faxed to potential manufacturing sites; they did not contain detailed manufacturing specifications. Given the large volume of calls and communication congestion, there was limited direct contact with Aisin personnel as well. Toyota decided not to pressure these suppliers into providing the part as a priority. In the absence of the specialized machinery at Aisin that was destroyed in the fire, the P-valve production had to depend on a large number of improvised steps that used a significantly larger amount of labor. Historically, Aisin had 70 inspection steps per piece with specialized gauges. Therefore, to ensure that quality parts were being shipped to Toyota, all P-valves were shipped to Aisin for quality checks before they went to Toyota.
Each of the suppliers used different supply chain processes to produce the P-valve, but because all the suppliers were trained on the Toyota production system principle, those different approaches still fit within the Toyota way of manufacturing and delivery. The flexibility to create individual supply chains yet fit within the overall system is often held up as a shining example of the value of standardizing processes across the supply chain.
One supplier, Denso, decided to outsource its existing production to free up capacity to produce P-valves on more than 40 machines. It decided that because of evolving design understanding, process learning, and the like, the system would be too complex to manage if it were outsourced. Another supplier, Taiho, met with its suppliers and chose 11 suppliers to assist by providing machining centers at its plants. Toyota pulled employees from its experimental prototype division and set up a temporary production facility. Supplier Kayaba outsourced the P-valves to three of its suppliers and produced no valves itself. Each of these firms, in turn, created its own emergency response teams to coordinate production and delivery.
One supplier started delivering prototypes three days after the fire. Denso delivered its prototype on February 5, followed by two other large suppliers the same day. Kayaba delivered prototypes on February 6 from one supplier and February 7 and 8 from the other two suppliers. Volume production began within a day or the same day of prototype approval.
Denso took the lead in identifying and eliminating bottlenecks across all suppliers. Productivity improvement approaches were implemented to decrease processing times at machines.
During this period there was constant flow of personnel across all of these locations to disseminate information and resolve production bottlenecks. Among them were Toyota personnel scattered across the production locations and individual supplier personnel. All of these steps were taken without any contracts regarding reimbursement of suppliers for costs. Meanwhile, Aisin Seiki started increasing its own production and boosted its production level to 100 percent by mid-March.
Aisin Seiki decided to compensate all of the suppliers for the costs incurred to manage this production, while Toyota compensated its supply base with 1 percent of its sales from January to March 1997. These funds in turn were passed along to individual component suppliers and others so that it disseminated throughout the system.
What does this show? Being part of the Toyota system and applying Toyota principles, and knowing that everyone else can be counted on to follow these processes as well, makes the system far more resilient to disruptions. The level of trust in the supply chain means that Toyota can comfortably expect a supplier to take the lead and solve problems without the need for centralized coordination. Low inventory in the system means that bottlenecks anywhere are every supplier’s problem. The sharing of resources and the flexibility of response permit innovative individual suppliers to be both efficient and responsive.
West Coast Port Strike
During 2002, there was an extended shutdown of the U.S. West Coast ports. It had a devastating impact on the North American auto industry, including Toyota, as highlighted in an article from Auto Parts Report,3 which stated: “Operations at many of the nation’s vehicle assembly and auto parts plants are slowly returning to normal after a federal judge ordered an injunction under the 1947 Taft-Hartley Act to end lockout of about 10,500 union workers at U.S. West Coast ports. The lockout started Sept. 29th.”
The U.S. economy was losing up to $1 billion a day, and the automotive industry was particularly hard hit because imported parts and vehicles could not be delivered. The Motor & Equipment Manufacturers Association (MEMA) estimated the value of automotive products and vehicles shipped into West Coast ports to be at least $42 billion in 2002.
This port work stoppage is a good example of how Toyota responds to crisis events when there is some advanced warning. In this case, negotiations were ongoing between management and the union for several months before the lockout actually occurred. Toyota was able to organize its crisis management team in advance to develop contingency plans. The following were some of the actions taken to mitigate the impact of the potential shutdown of the ports:
- Build up inventory of parts at the North American plants by gradually increasing parts orders for several weeks prior to the projected shutdown. Doing so would enable Toyota to continue to operate its plants until alternate shipping arrangements could be implemented.
- Contract with air cargo companies to lease several cargo planes to transport parts during the shutdown.
- Investigate alternative ports of entry where ships at sea could be diverted. For example, ports in Mexico and Canada remained open during this time.
That advanced planning paid off, because Toyota was able to move quickly to implement its initiatives to minimize the impact on North American plant operations. The availability of fast air transportation shortened the inventory pipeline and enabled plants to receive parts shipments during the time when the ports were closed. Those capabilities allowed plant velocity to be maintained at the highest level possible. Likewise, adjusting inventory in advance based on visibility of planned production provided effective temporary buffers. This example shows how Toyota compromised the “lean manufacturing” paradigm to manage during the crisis.
9/11 Terrorist Attacks
The terrorist attacks on September 11, 2001 (9/11) are an example of a major crisis that certainly was not predicted. Toyota as well as other automotive companies did not have any opportunity to do any advance planning for that event.
One of the immediate impacts to the supply chain was the heightened security measures implemented at all ports as well as the border crossings between the United States, Canada, and Mexico. Those increased security measures created an uncertainty for the delivery times for parts shipments coming into the United States, and there was not any indication of how long this slowdown would last. Another impact that would become apparent in a short time was the slowdown in vehicle sales because of the ensuing recession.
Toyota had to assemble a crisis team with members from all North American plants, North American sales companies, and TMC in Japan. Because of the nature of the crisis, Toyota had to take immediate action to temporarily stop production at its North American plants until an assessment could be made of the impact of the crisis. The following are some of the actions that were taken:
- Production schedules and rates were adjusted to react to the slower delivery of parts.
- Sales prioritized the production volume of each model based on the projected selling rate and dealer inventory.
- Logistics evaluated the impact on parts shipments of additional security checks at border crossings and ports. That effort required an adjustment of parts lead time schedules for some of its suppliers.
The adjusted system involved velocity changes to synchronize with deliveries, variety adjustment to prioritize parts use, and visibility across the system to enable rapid adjustments based on available parts.
Freescale Worldwide Capacity Issue
Freescale is a leading manufacturer of semiconductor chips that it supplies to the auto industry. During 2005, Freescale was unable to produce wafers at a high enough volume to provide an adequate supply of chips to the auto industry because of manufacturing problems at one of its plants in France. At that time, auto industry sales were at a peak and all auto companies were producing and selling vehicles at very high levels. Therefore, when the news hit that Freescale was not able to meet demand for an extended period of time, a worldwide auto crisis ensued. To make matters worse, the shortage situation was not one that could be resolved quickly; the problem would take several months to fix.
Toyota responded by assembling a crisis team that included sales and manufacturing groups in North America, Europe, and Japan. The following were some of the multiple parallel actions that were initiated:
- Establish daily communications with the crisis team.
- Dispatch a team to assist the plant in France that was the source of the problem.
- Assess the on-hand and pipeline inventory of all related parts.
- Pull ahead pipeline inventory when necessary to maintain plant operations by air shipping parts to shorten lead time.
- Allocate common parts to vehicles in highest demand and slow production of parts for slower-selling vehicles.
- Work closely with other auto manufacturers and Freescale to ensure that Freescale’s production was allocated fairly to all auto companies.
Parts allocation based on variety with the highest demand enabled prioritization of production. Daily communications and visibility made possible optimal use of all available inventories. Use of air shipments permitted shortening of the pipeline, which provided greater physical inventory. Collaboration with the supplier brought about reduction of variability in yields and improved parts availability. Synchronization of production velocity with parts availability allowed plant production to continue and use the same principles as during normal operations.
Dealing with the Asian Financial Crisis
Attracted by market opportunities in the Association of Southeast Asian Nations (ASEAN) region, Toyota had steadily increased production in Thailand in the 1990s. When the industry had hit a peak in 1996, Toyota had invested US$200 million in a new facility to increase production capacity from 120,000 units to 220,000 units a year.
As the financial crisis hit the region beginning in July 1997, auto sales in Thailand started to slump, ultimately falling 60 percent from 1997 to 1998. However, Toyota saw the long-term potential for the region, and instead of scaling back production like other manufacturers, it instituted several other changes to help sustain its operations in the region:
Shift to exports. As local sales slumped, Toyota undertook a major restructuring of its operations to shift its Thailand production to exports. For example, Toyota Motor Thailand (TMT) increased exports of Hilux trucks to Australia from 600 in 1997 to 20,000 in 1998. To incorporate this shift, Hino, a Toyota-affiliated manufacturer in Japan, had to decrease its output of Hilux trucks by the same number and had to be compensated by an additional capital investment by Toyota. Vehicle specifications also had to be harmonized across several countries. In addition to vehicle exports, Toyota also began exporting diesel engines from Thailand to Japan.
Sustain suppliers and parts manufacturers. To help parts suppliers through the decreased output levels, Toyota accepted price increases of 6 to 20 percent, which was contrary to its policy of continuous price reduction; the company also provided preshipment payments to help suppliers deal with the severe credit crunch. To absorb these costs, and also to provide financing to car buyers, the Japanese parent also supplied additional capital to the tune of 4 billion Thai baht to Toyota Motor Thailand.
Sustain the workforce. Toyota did not lay off any of the workers, taking this time instead to retrain part of the workforce and send large teams to Japan to upgrade their skills. The number of employees was reduced to some extent through an early-retirement scheme, and jobs done by outside subcontractors were transferred in-house.
This long-term vision proved to be successful for Toyota, and today it dominates the Thai auto market, with a 2007 market share of 44.7 percent and leadership in both the car and commercial vehicle segments.
The development of the Prius provides an example of a remarkable “going to the moon” type event at Toyota. At the time that plans for the Prius were finalized, large cars were in vogue and gas was under $1 per gallon. Gas mileage was not a consideration for many people, and for those interested in the environment, riding a bicycle was thought to be a better thing to do than driving a car. It was in this environment that Toyota developed the Prius, a car designed to better the average mileage of an automobile by 50 percent. (The highest-mileage car at the time, the basic Corolla, had an average mileage of 30.8 miles per gallon.)
As Liker reports,8 the team consisted of a general manager and his group of 10 middle managers who reported directly to a high-level committee of board members. The choice of a hybrid engine was significant because it had not (at the time) been proven on a mass production basis. As the project unfolded, the deadline shrank to less than one year to develop the hybrid engine and vehicle. At the time of this design goal, there was no plan regarding how this goal would be attained. The team was provided a time frame of two years to develop such a car. Long before this design decision, Toyota had been working to best leverage the use of information technology in enhancing car performance. A quote from a senior Toyota executive is appropriate: “Each time, a new business model changed the ground rules for the industry. Each time the new model seemed invincible. And each time, it gave way to changing circumstances and a new business model. . . . Our old business model is breaking down for four main reasons. One, we need to decentralize our manufacturing and R&D [research and development] activities. . . . Two, the product and process paradigms that Henry Ford established are themselves breaking down. . . . Three, information technology is transforming the inner workings of the automobile. It is also transforming the way we develop and make and sell our products. And four, the changing product paradigm and the growing role of information technology (IT) will open our industry to a vast array of competitors.”
Given such a long-ranging plan for the use of IT, it is not surprising that IT was used significantly to coordinate the development of a battery that would operate with an internal combustion engine. The challenge during the development of the Prius was the highly compressed time frame for the development of the car. All of the principal engineers worked eagerly to complete model development in 15 months. Some engineers were moved to a company dormitory to be away from distractions and devote them to the project. As the project evolved, over 1,000 engineers who were involved in the project left their families and moved into a dorm for about 18 months. Team members focused their entire energies on creating a product that conformed to the principles of the Toyota Way (described in further detail in Chapter 11) by enabling car technologies that were consistent with the booming demands of emerging markets. In the process, they created value for consumers and the society by generating environmental benefits.
Clearly, the development of the Prius was an internal crisis trigger that served to motivate the product development team to create a car with new technology in 15 months. But such pressures only serve to highlight the benefit of well-crafted processes and their success under testing circumstances.
Crisis management at Toyota highlights how the v4L framework applies to many different situations. Learning and leadership are equally necessary to facilitate such execution. The following are links to the v4L framework:
- Variety. Careful balancing of the variety of products produced and the associated parts and capacity requirements, with available parts suppliers and in the pipeline, play an important role in maximizing the benefits and minimizing the corresponding impact on the system.
- Velocity. Synchronization of velocity across the supply chain is crucial to ensure that bottlenecks are avoided.
- Variability. Variability across the system is managed by insisting that new processes continue to follow accepted working processes so that quality and performance will not be compromised.
- Visibility. The role of managers in the system is both to create internal visibility to enable effective coordination and to provide an on-site presence to manage the problem. Also, a separate outside communications manager provides visibility to the outside world.
The learning methods of Toyota are certainly applicable to crisis management:
- Create awareness. Potential crises are identified by looking for patterns such as a bunch of shipments that are delayed or deterioration in supplier’s financials.
- Establish capability. Toyota communicates both internally and externally to all interested parties so that they become aware of both the crisis management process as well as the steps taken to mitigate the impact of the crisis.
- Make action protocols. The process of crisis management is scripted and communicated to supply chain participants.
- Generate system-level awareness. Toyota selects the appropriate crisis owner and then discusses both short-term and long-term mitigation.
- Produce the ability to teach. Toyota’s senior managers are able to articulate the crisis management steps clearly and provide examples to illustrate.