Abdulfetah Khalid

EMBA 2020-2022
Ahadi265@gmail.com
I chose Toyota for this assignment because I work in the automotive export sector, and I
export Toyota cars most of the time. I personally faced some of the effects of Toyota supply
chain problems. The latest one was the delay in the delivery of the Toyota RAV 4 car I
ordered due to water supply issues in Toyota factories in late 2022.

1, Pre-2020 Global supply chain

• Procurement strategies

Toyota is well known for applying the Toyota production system as its manufacturing
philosophy. (TPS) relies on the just-in-time (JIT) inventory system. JIT is a management
strategy that aligns raw- material orders from suppliers directly with production schedules.
Toyota adapted its JIT inventory system when it realized that the production cycle of critical
car parts was too long to cope with devastating shocks such as natural disasters. After the
Tohoku earthquake, it decided to stockpile critical car parts on a regular basis and came
up with a “business continuity plan” (BCP), which required suppliers to stockpile chips for
Toyota for two to six months.

Fig 1, Diagram of Toyota supply network

Toyota uses pyramidal structure for its raw material sourcing as shown in the picture
above. According to the research done in 2014, there are 580 firms in Tier-1, 1476 in Tier-2
and 136 in Tier-3. It is expected the amount will be much larger now. Toyota also applies
close correlations between its supplier's geographical location, its manufacturing plant
and the distribution center of their products. All their suppliers and distributions are in 4
broader geographical regions (Japan, America, Europe and Asia).

• Transport modes

Toyota ships thousands of vehicles and parts every day. It mainly uses marine time
transport modes for delivering its cars and parts from manufacturing plants to distribution
centers. The group owns its own marine transportation company called Toyofuji Shipping.
Toyofuji Shipping delivers its customers valuable products to major ports both in Japan
and overseas. It has a subsidiary branch in Europe for short sea operations within the
region, located here in Belgium. It also works with other shipping companies to deliver its
products.

Toyota also transports vehicles by cross-channel rail freight inside geographical regions
mentioned above. For example, Toyota transports new cars by cross-channel rail services
between its Valenciennes Vehicle Logistics hub in France and Toton (UK).

• Hubs and shipment volume

Toyota has 71 manufacturing companies worldwide of which 8 of them are in Europe. In

Europe alone Toyota has 7 dedicated hubs and 3300 delivery points. They also have 18
central distribution warehouses throughout Europe. In addition, there are around 600,000
parts and accessories movements per day.

Toyota uses certified dealers and retailers as an outlet for distribution of their products. In
almost every city throughout its 4 geographical regions (Japan, Asia, Europe and north
America), it has its own certified dealers.

Impacts of the perfect storm

Covid-19 crisis brought two perfect storms. In the early stages of COVID-19, there has
been a huge drop in car demand. That results in a huge stock overflow of supply outbound
supply chain. According to the report from McKinsey (1), auto sales plummeted as much
as 80 percent in Europe, 70 percent in China, and nearly 50 percent in the United States. It
also forced several factories to close and lost billions of dollars in revenue.

In the later stages of COVID-19, the challenges shifted to the supply side where there was
a huge shortage of semiconductors in the automotive industry. The global semiconductor
shortage that began in the first quarter of 2021. The shortage was derived by the shift to
remote work in late 2020. There was huge customer demand for personal computers,
servers and other electronic devices which depend on semiconductors.

On the contrary, there was a significant cut in semiconductor orders from automotive
industry due to the shortage of demand in 2020. In addition, the semiconductor industry is
a mature industry through consolidation of top firms. Thus, when the unexpected recovery
in the auto industry happened in early 2021, the semiconductor sector was already serving
other customer segments. That forced most OEMs to halt assembly lines around the
world.

Toyota response to semiconductor shortage

Toyota was one of the companies expected to be hit severely by the shortage of
semiconductor ships as its production systems rely on lean concepts. Toyota uses TPS,
Toyota Production System, where its philosophy aims to eliminate waste and achieve the
best possible efficiency – what is often called a “lean” or “Just-In-Time” system. However,
Toyota fared better than most competitor automotive companies in riding out the
disruption as it strategically seized the inventories in the right locations with the right
amount. They also had safety stocks that factored in the risk of disruption.

Toyota prepared very well for the upcoming crisis because it learned a lot from the
Tsunami of 2011 and Tohoku earthquake. They updated lead times that took into
consideration not only the time it takes to procure raw materials, produce the part and
deliver it; they also considered the location of raw material suppliers including the
semiconductors.

Toyota also used dual-sourcing strategy to create resilient capability contrary to other
firms who use the approach for price reduction via bidding war between suppliers. In
addition, they have a trusting relationship with the suppliers. That helped when the chip
shortage crisis happened as they had helped solve several technical problems of suppliers
in the past. They use their experience, production usage rates and patterns to update their
lead time and have appropriate inventory plans.

They also take responsibility when unexpected crises occur that affect their supplier. Just
three months ago, Toyota decided to compensate 420 of its suppliers for lost revenue due
to its suspension of shipments that it ordered.

In general, the TPS system helped them pass through significant disruption as it is
designed for learning. As is well known, TPS focuses on learning and continuous
improvement. That helped them to learn from what happened a decade ago and be ready
when the COVID-19 chip disruption affected the industry.

Suggestion

1, Improved long and short-term planning

The automotive industry relied on short-term demand base planning for its supply chain.
However, the Covid-19 and its subsequent chip crisis proved that the sector needs to
consider long-term perspective and innovative approach in its demand projection. Tier 1
suppliers and OEMS need to improve their strategy to consider the technological
challenges and natural disruption issues.

As the innovation in the auto industry is quite fast, having huge inventory in some parts
might have its own risks. On the contrary, securing back-up inventory like Toyota helped in
times of crisis. In general, as the auto industry is going through raw material shortage and
uncertainty of demand, OEMS and their suppliers should develop an innovative approach
to address the ongoing and upcoming challenges than use the old-school short-term
demand projection-based planning.

Toyota is struggling in the Electric Vehicle (EV) ecosystem as it lags in innovation and
supply chain of critical raw materials. Just two months ago, Akio Toyoda, chairman of
Japanese carmaker Toyota admitted Toyota will never catch on the EV train and will focus
on multi-pathway approach of producing Internal combustion engine, hybrid and electric
cars. On the contrary, the EU will ban sale of ICE cars from 2035. Thus, long-term planning
should consider the industry trends also.
2, Diversifying the supply chain

The COVID-19 and its follow up semiconductor crisis awaken the auto industry not to rely
on single sourcing area. So, applying dual sourcing and near shoring is important to reduce
the risk of supplier failure and transportation issues.

3, Strategic partnership and Joint ventures

As Toyota is lagging in the EV industry due to lack of innovation and sourcing of raw
materials, it should consider collaboration between companies that are leading the EV
revolution. Toyota has brand and route to market exposure that most of new EV entrants
do not have. So, a joint venture or partnership with EV raw material suppliers is one of the
key strategic moves Toyota should consider catching up other competitors in the EV
sector.
Reference

1, https://www.mckinsey.com/industries/automotive-and-assembly/our-insights/coping-
with-the-auto-semiconductor-shortage-strategies-for-success

2 https://www.mckinsey.com/industries/semiconductors/our-insights/semiconductor-
shortage-how-the-automotive-industry-can-succeed

3, https://education.nationalgeographic.org/resource/tohoku-earthquake-and-tsunami/

4, https://core.ac.uk/download/pdf/288287689.pdf

5, https://asia.nikkei.com/Business/Automobiles/Toyota-unit-Daihatsu-to-compensate-
420-suppliers-for-lost-revenue

6, https://www.reuters.com/business/autos-transportation/toyota-suspend-morning-
shift-one-japanese-factory-due-water-supply-2022-05-18/

7, https://news.yahoo.com/toyota-slams-electric-cars-says-
145359521.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&g
uce_referrer_sig=AQAAAGa4O3Gb0cXH2eqxBpDit0ZaSrUg3okIYd-
n0UYoDLa6uSp4qVWExgUxnMIGoZ3xdG92yFo7eL2xdR2J-
FmrGHeKz33rBZm7XjJFRSyFYYVnuvHnNLU1XckXG-X-emSe0Zay4QTN-
oVI05d7lkJtn0PW0eH1OxhmhLpskhWIS8-
J#:~:text=Toyota%20has%20been%20bearish%20on,to%20the%20disappointment%20of
%20shareholders.&text=But%20now%20that%20EV%20sales,is%20starting%20to%20loo
k%20different.

8, https://www.economist.com/business/2022/06/12/how-supply-chain-turmoil-is-
remaking-the-car-
industry?utm_medium=cpc.adword.pd&utm_source=google&ppccampaignID=181517380
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vBhBbEiwAzqrZVEiYNyfE1Mga6ZdMtGWgYj5jzm0rSXW-kU8iB_m-Fz-
3zEbv3DXqfxoCxEYQAvD_BwE&gclsrc=aw.ds

9, https://kpmg.com/xx/en/home/insights/2022/05/vulnerable-supply-in-automotive.html