18 October 2021

No toys for Christmas? Blame Eiji Toyoda

By

Felixstowe in Suffolk is the home of the busiest container port in the UK. It also happens to be my home town. So for a real-time spot check on the state of global logistics I only have to go to my top floor study and look across the deep water channel that leads ships into the Orwell Estuary terminal. Are the mega container ships moving full speed across the horizon? Or are they lining up at anchor queuing for a precious berth at the Hong Kong-owned terminal? Because if the latter, something has gone wrong. 

So it is I can report: something has gone wrong. The global supply chain – that thing that we usually don’t have to think about – is all snarled up. And it is not just the supply chain world outside my window. Dysfunction in logistics is a worldwide phenomenon. Last week there were over 500 container ships queuing to dock in ports worldwide, with long delays in Los Angeles, Savannah, Rotterdam and elsewhere. Meanwhile companies everywhere are paying through the nose for their late deliveries: today it costs more than $10,000 dollars to ship a 40-foot container from Asia to Europe, compared to about $2,500 a year ago.

It seems like a no-brainer to blame such shipping costs and delays for the current rash of shortages. But it may be they are only aspects of a wider problem, because shortages are no longer episodic: they are beginning to look structural, with industrial economies particularly vulnerable to bottlenecks and breakdowns

Even the mighty Toyota, the world’s biggest carmaker by annual sales in 2021 and long seen as the most efficient of all auto manufacturers, has had to cut its annual output forecasts because of factory closures by its chipmakers in Malaysia and Vietnam. And there is an irony in that, given that at the very root of what is now looking very much like an era of supply shortages there is a strong connection to Toyota and its influence on companies everywhere. 

Eiji Toyoda was one of the greats of Japan’s post-war manufacturing renaissance. A manager in his family-owned company making automatic fabric looms, he was instrumental in transforming that business into what would become Toyota Motor Corporation. But as it grew Toyota did more than just export cars: it also spread its manufacturing philosophy around the world, to the point where there can be few organisations that have not been shaped in some way by Toyota’s lean manufacturing, just-in-time production systems and ‘total quality management’ techniques.

Just-in-time was the creation of Eiji Toyoda and his Toyota production engineer Taiichi Ohno and today it remains the dominant organisational mode at most large organisations. At its simplest just-in-time is an inventory management system that uses the Toyota approach known as ‘Kanban’ to shrink the number of components to the barest minimum. Getting the components to exactly where they are needed at the right time becomes the responsibility of suppliers. Meanwhile the manufacturer dispenses with most of the costs of inventory management. In this way operational risk is spread around the supply chain, but that doesn’t seem to matter so long as the supply chain works as intended.

This is a system that worked well for Toyota, and for literally thousands of other large companies that have followed the Japanese company’s lead. Indeed, the Kanban system has spread into every corner of organisational activity. The Toyota engineer Taiichi Ohno wrote influential books on how Kanban could be put to work in design and customer service as well as manufacturing, and in a later manifestation companies started using the core ideas of Kanban to design more efficient ways of doing anything a business does. Today these techniques are known as ‘scrum’ and ‘sprint’ (and, being full of jargon, are much beloved of consultants) but they all derive from Eiji Toyoda’s lean manufacturing philosophy.

The problem – as we can now see – is that just-in-time and lean manufacturing are very vulnerable in a world experiencing fast-moving large-scale dislocations. Such dislocations might not have had much impact in the Japan of the 1940s, where supply lines were short and suppliers tended to be located within a few miles of a manufacturing operation, but that is not the case today. Japanese companies have been as enthusiastic as any when it comes to globalising their sources of supply.

It will not come as news to large companies that they have ended up much more vulnerable to supply chain disruption than they intended. Ever since the start of the Covid pandemic there has been extensive discussion about how to build a higher level of resilience into corporate operations, and this has already become a staple of the corporate advisory business which is now hard at work telling companies how to put previously advised cost-cutting and ‘offshoring’ into reverse.

If companies are indeed to move from lean to resilient operations, it will be a long and painful process. But at least there are working models to follow, regional economies where extended supply chains never fully took root. It is noticeable for example that the pandemic has caused less disruption in the ‘industrial triangle’ of northern Italy – one of the most productive industrial regions of the world, with a tradition of strong supplier relationships between companies that are geographically close. Many of the luxury car and motorcycle makers in the triangle bounced back very quickly from initial shutdowns, and several have recorded their best performance in many years.

Meanwhile Eiji Toyoda – who died in 2013 – would have been horrified to find that his manufacturing innovations which were designed to make companies more resilient, not less so, were now being seen as the root of a manufacturing malaise. Still, as a lover of Sudoku, he would no doubt have tackled this puzzle with his customary speed and insight. 

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Richard Walker is a journalist and communications adviser to financial companies.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.