Supply chain matters – the Toyota story

General Motors, popularly known as GM, had been the largest seller of vehicles in the United States from 1931 to 2020. The Detroit-based automaker dethroned Ford back in 1931 to clinch the number one position. To the surprise of many, GM's 90-year-long glorious streak as the top US car seller ended in 2021 when the Japanese auto giant Toyota outsold them.

According to industry data, GM sold 2.22 million vehicles in the US last year, a decline of 12.9 per cent compared to 2020. Toyota sold 2.33 million vehicles, up 10.4 per cent. The difference in sales between the two competitors was 114,034 vehicles.

Readers might have started to think what the underlying reason was behind this unprecedented feat of Toyota? Was it for the launch of novel products? Aggressive pricing strategy? Wider distribution coverage? Or compelling marketing campaigns? Surprisingly, none of these factors was the reason that helped Toyota reach the top position in the US auto market. This historic swap in position happened because Toyota was smarter than GM in terms of managing supply chain issues better. Wondering how?

A computer chip, also known as a semiconductor, is one of the key components of a vehicle. For the last couple of years, there have been acute shortages of this chip to meet industry demand. Consequently, many companies like GM, Ford, Volkswagen, Volvo and Honda had to slow down or temporarily halt their production.

This crisis had, in fact, started prior to the pandemic because of the rise in 5G, which significantly increased the demand for semiconductors putting huge pressure on the suppliers to keep pace with the demand. The decision by the US to prevent the sale of semiconductors and other technologies to Chinese tech giant Huawei worsened the situation.

Chipmakers outside the US were quickly flooded with orders from the Chinese firm. Only two companies in Asia – Taiwan's TSMC and South Korea's Samsung – manufacture as much as 70 per cent of the world's semiconductors.

Data showed globally semiconductor sales declined between 2018 and 2019, but by 2020, sales grew 6.5 per cent. This rapid growth continued in 2021.

One of the major drivers for the rise in the demand for semiconductors in the auto industry was the adoption of technologies such as driver assistance systems and autonomous driving. According to Intel, this critical component will account for more than 20 per cent of the input costs for new premium cars, up from 4 per cent in 2019. 

Analysts say Toyota was the only automaker prepared to deal with chip shortages. It was not because it sensed it earlier that there would be supply constraints and the coronavirus pandemic would hit the world like a bolt from the blue, but because it, along with the entire Japanese car industry, went through a similar ordeal after the devastating Tōhoku earthquake of 2011. The repercussions of the disaster were so severe it took six months for Toyota to get production back to normal levels outside of Japan, while at home they could do it two months earlier.

It learned from that episode, and completely revamped its policies which enabled them to maintain a steady pace of production. In the aftermath of the earthquake, Toyota estimated its procurement of more than 1,200 parts and materials might be affected and it drew up a list of 500 priority items, including semiconductors, for which it would need secure supply.

It decided to stockpile those critical components. This was completely the opposite of the policy known as 'just-in-time' (JIT) that Toyota pioneered and had been practising for decades.

The fundamental concept of JIT was to supply various items and components to its factories as and when they require. As a result, it did not have to maintain any inventory of parts or materials. JIT was so successful that Toyota emerged as an industry leader for efficiency and quality.

However, after the 2011 catastrophe, it came up with a plan that required suppliers to stockpile anywhere from two to six months' worth of chips, depending on the time it takes from order to delivery. That's how Toyota has so far been largely unscathed by a global shortage of semiconductors.

We can learn a lot from Toyota's experience of managing its complex supply chain. It was quite evident that smooth supply of raw materials, managing inventories and above all, managing the entire supply chain are becoming critically important for organisation's success, especially in the backdrop of an extremely volatile and uncertain environment. However, one has to remember that more inventory means more pressure on working capital. Therefore, we just can't and shouldn't build inventory for each and every item indiscriminately.

In order to have informed and prudent decisions, there should be complete visibility on our tier-1 suppliers. This would help companies maintain proper inventory. Organisations have to be always alert and be flexible in terms of coping with any kind of disruptions.

According to a Mckinsey report, the supply chain has become one of the key CEO agendas in the last 18 months. Earlier, it was always seen as necessary but not really that critical. It's only visible if things go wrong.

Nowadays, the supply chain has become more and more important because it's the most cross-functional part of any business. It involves sales and marketing, finance, manufacturing, and procurement. To really get the end-to-end supply chain, the whole organisation has to work together.

Organisations need to think about the supply chain as a clear enabler for their success. They need to invest in resilience to make sure that the supply chain can deliver as it's meant to do. No wonder one of the top business leaders commented, "You know, availability is this year's innovation. If you have a product on the shelf, that's better than any new product introduction that's coming along."

The author is chairman and managing director of BASF Bangladesh Ltd. Views are personal.