Toyota beat car shortages by tweaking lean production. : Planet Money : The Indicator from Planet Money Toyota pioneered just-in-time production. But this lean method is dangerous when car parts are in short supply, like in a pandemic. Today: How Toyota invented and reformed just-in-time production.

Toyota Camry, supply-chain hero

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SYLVIE DOUGLIS, BYLINE: NPR.

(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")

DARIAN WOODS, HOST:

In the early 1930s, when Kiichiro Toyoda was working at the family business, Toyota, the company didn't make cars. There was no Corolla, no Camry. Toyota made mechanical looms for weaving fabric.

STACEY VANEK SMITH, HOST:

But Kiichiro had a vision. He wanted to take his father's company in a whole new direction. He wanted to build cars. Of course, the odds were stacked against him. At the time, Japan's car industry was tiny. And also, if the gamble failed, he would be risking the reputation and finances of his father's very successful loom company. The stakes were high, and Kiichiro was new to the industry. So he wanted to figure out some kind of an edge so that he could compete with the much larger global carmakers.

WOODS: Kiichiro opened Toyota's first dedicated car factory in 1938, and to compete, he knew he had to totally rethink the way factories were run. Kiichiro hated waste. He didn't want his workers waiting around for car parts or, on the other hand, he didn't want car parts piling up in storage, taking up more and more space. So he developed a system. He called it just-in-time.

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WOODS: This is the INDICATOR FROM PLANET MONEY. I'm Darian Woods.

VANEK SMITH: And I'm Stacey Vanek Smith. Just-in-time production was a revolution not just for Toyota, but for other car companies around the world, although it did have this flaw, a flaw that became very apparent during the COVID crisis, also, a flaw that somehow the inventor of just-in-time production managed to avoid.

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VANEK SMITH: Companies all over the world have been really struggling with supply chain issues since COVID began, and the car industry has been especially hard hit. Shortages of microchips, also known as semiconductors, have been brutal. They're used all over cars these days. And these chip shortages have caused Nissan, Honda, General Motors, Ford and others to even shut down some factories because they just can't get the chips they need to make cars.

WOODS: And one reason why car companies have had to cut production is because they adopted some principles from this just-in-time production system, which was pioneered by Kiichiro Toyoda.

LEILA ARIDI AFAS: I mean, goodness, I studied it in business school.

WOODS: This is Leila Aridi Afas, Toyota's global strategy and policy director.

ARIDI AFAS: It really was touted as the way to keep manufacturing lean and efficient.

WOODS: Just-in-time production is also known as lean production, and it means only making each component as you need it, not building big inventories.

VANEK SMITH: Yeah. When Kiichiro first put just-in-time production into practice in the 1930s, the workers at Toyota hated it. If one team built too many engine blocks, for example, they would have nowhere to store them. And Toyota boss Kiichiro Toyoda would, like, roam around the factory, throwing away the excess parts, which, you know, if you've just spent hours and hours putting together one of those parts, has to kind of sting. Imagine if we did that at THE INDICATOR (laughter).

WOODS: Yeah, I would not be happy.

(LAUGHTER)

WOODS: But Kiichiro's just-in-time system kept being refined. His protege, Taiichi Ono, looked at supermarkets. And in most supermarkets, that shelf is the inventory. There isn't a big warehouse out the back storing rice and milk. When customers take rice or milk from the shelf, the supermarket managers order more. Customers buy only what they need, and in turn, the supermarkets order only as much as they need to refill the shelf.

VANEK SMITH: Yeah. They don't have a bunch of food going bad. And Taiichi realized that he could apply the supermarket system to the different teams inside of a car factory. So, like, when a worker took a bag of bolts from the shelf, they'd put in a cart called a kanban that would alert the bolt-making team right away that they needed to make more bolts.

WOODS: Toyota became known worldwide for its cheap and pretty reliable cars, and the just-in-time system was a big part of that success. Just-in-time production later spread all over the world, influencing big companies from IBM to John Deere and, of course, car companies.

VANEK SMITH: And, you know, the same concept of this just-in-time production was used to develop things like fast fashion. Companies like Zara and H&M found that it was cheaper to, like, move with new trends when you're not burdened by a bunch of excess inventory or, you know, last season's materials lying around.

WOODS: Yeah. I mean, what are you going to do with all those pleated skirts? I mean...

VANEK SMITH: Or all the skinny jeans. What are you going to do with all the skinny jeans?

WOODS: Exactly.

(LAUGHTER)

WOODS: As you can imagine, just-in-time is great until there is a disruption, which is what Toyota found in 2011, when a huge earthquake and tsunami hit northeast Japan. It was a human tragedy, and it had a crushing impact on business, too. Here's Toyota's Leila Aridi Afas.

ARIDI AFAS: It just had devastating consequences. In fact, one of our main suppliers for semiconductors was offline for many months.

VANEK SMITH: Even in the U.S., Toyota's North American factories had to cut production by 75% because they relied on Japan for parts.

WOODS: Toyota realized that just-in-time needed to be adapted to deal with crises, so Toyota did a stocktake. The company worked with its suppliers to document what's needed to make a car.

ARIDI AFAS: They really looked at every single part that goes in the car, and that's about 25,000 to 30,000 parts. So they're looking at a lot of things. And they realized there's about 1,400 parts that are just absolutely critical to the manufacturing a vehicle.

VANEK SMITH: Those 1,400 critical parts were things like motor components and braking systems, not things that were easily substitutable like a rearview mirror or something like that.

ARIDI AFAS: Semiconductors was one of the top of the list of parts that you absolutely need.

WOODS: Toyota needed to be assured that even in a disaster they'd still be able to source those 1,400 parts, so they developed a hybrid system. Most parts would stay just-in-time, but going against the way that they've been doing things for 80 years, those 1,400 parts would have more inventory and longer lead times.

VANEK SMITH: Also, Toyota developed this huge database, a kind of monitoring system, so that the company had all this information about their suppliers - where they were located, when they looked like they might be running short on production. In fact, this database has information not only on their suppliers, but on their suppliers' suppliers and their suppliers' suppliers' suppliers.

WOODS: It's suppliers all the way down, Stacey.

(LAUGHTER)

ARIDI AFAS: Like an early warning signal that, oh, we're running short on this or, oh, there's a disruption or, oh, there's happening. And so at the beginning of the chip shortage that we've experienced now, we were able to slightly weather the storm a bit better, better than some others, for the simple fact that we had experienced devastation to our supply chain 10 years earlier.

WOODS: When the pandemic hit, Toyota and its chip suppliers had learnt the lessons from the 2011 earthquake and tsunami. Toyota had up to four months worth of inventory for key components like chips. They almost looked through the pandemic and stayed focused on their long-term goals and ensured that critical components like computer chips were still available.

VANEK SMITH: As a result, Toyota overtook Volkswagen Group last year, producing the most cars in the world. And over the last year, Toyota has mostly avoided the chip shortage. In the spring, when other car companies like Ford and Honda were slashing production and shutting down factories, Toyota was holding steady.

WOODS: But this pandemic has been so deep and so global, and it's gone on for so long that even this new approach to just-in-time production couldn't outrun the pandemic forever.

ARIDI AFAS: We announced a couple of months ago that globally we have to cut production by 40%.

WOODS: That's a large reduction.

ARIDI AFAS: That is a - that - you said it. That is a large reduction.

VANEK SMITH: Now, Toyota says it's running short on all kinds of components, little things that you might not even think of associated with the car. For example, there are these little harnesses that are used to sort out the cables inside of a car's engine. There's a shortage on those. They're mostly made in Vietnam and Malaysia. So now Leila and Toyota are thinking about the future - how the company is going to move forward after the pandemic passes.

ARIDI AFAS: What lessons can we learn? And how can we sort of not only be more efficient, but also make our business more sustainable or more better to weather future shocks? Then that is what they will do.

WOODS: Just-in-time production might have to be adapted once more.

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WOODS: The show is produced by Brittany Cronin, with help from Isaac Rodrigues. It was fact-checked by Taylor Washington. Viet Le is our senior producer, and Kate Concannon edits the show. THE INDICATOR is a production of NPR.

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