Just In Time production runs into the an economic slowdown.
This week the Wall Street Journal ran a fascinating article exploring Toyota Motor Corp.’s response to the supply chain shortages that have been aggravated by the Covid-19 pandemic.
You know the score: Automakers are having trouble keeping their production lines running because they’re running out of necessary parts, like the semiconductor chips that make all the electronics in your car go. But they’re also running short on things like resin, which goes into all sorts of things in your car. That stuff comes out of a Texas refinery — and thanks to that state-stopping winter storm in February, there’s been a big hiccup in production.
Suffice to say, automakers are having to scramble. “It’s shocking to me how much I’ve learned about the supply base,” the CEO of Ford Motor Company said at an industry event. That quote was kinda eyebrow-raising for me at first: How could these enormous manufacturing companies not know the details of their supply chain when an input seemingly innocuous as resin can prove so crucial to your finished product?
But then again, that’s now how auto manufacturing has happened for decades. It’s heavily shaped by just-in-time production principles, which are at the core of the Toyota Production System (TPS) – the famous philosophy pioneered by that Japanese company starting in the 1950s.
I’m greatly simplifying it, of course, but at its essence TPS teaches manufacturers to keep zero inventory on hand in order to free up your cash and focus on efficiency. Buy only the inputs you need at the moment and bring in more only as you need them. Here’s a great explainer video from Bloomberg:
Pretty interesting! However: This video was produced before a global health crisis and a decade of natural disasters made immediate and reliable access to those inputs a lot more of a crapshoot.
Suppliers are now responding to the squeeze – like chipmaker Intel, which is pouring money into foundry investments in New Mexico and Arizona to supply the American market. And automakers themselves are responding and trying to stockpile necessities. The Journal notes that Toyota itself is requiring some of its suppliers to stockpile parts for months in advance, which isn’t exactly a TPS principle. And the article also points out that Tesla is investing in raw material production so it’ll be able to rely on a supply of batteries for its electric cars.
That’s not yet like Ford mining its own iron a century ago, but the supply chain crunches are clearly causing the pendulum to swing away from just-in-time absolutism. It will be interesting to see what effect this has on the relocation of manufacturing activity into the United States.