The auto industry faces serious problems days after the Canadian border blockade was lifted.
Manufacturers have been adopting "lean" manufacturing over the past 30 years. The complex strategy, which is heavily inspired by the Toyota production system and relies on automation and other labor-saving measures, was largely lifted from Toyota. The core of the system is "just-in time," or JIT production. This has drastically reduced the inventory at automobile factories. This approach is highly vulnerable to disruptions, which can quickly bring down factories.
JIT production has made no industry more dependent than it has on agriculture, aerospace, and consumer electronics. This has led to some of the problems with supply chain disruptions, inflation, and other issues that the industry has had to deal with over the past two years.
Joe Hinrichs, the global head of Ford Motor Co.'s automotive operations, stated that "Today’s generation of automotive leaders learn from the Toyota production systems, focusing on cash out of inventory."
"Now, with all that's happened including Covid and the semiconductor shortage, geopolitical risk, and other events," said he, there is growing concern about lean manufacturing, JIT production in particular, not working.
Innovators were early
Japanese automakers made a significant impact on the American market when they first entered the country in large numbers in the 1980s. They used JIT production, which gave them some advantages over Detroit-based competitors. According to David Cole (director emeritus at the Center for Automotive Research in Ann Arbor), Michigan, their vehicles were more fuel efficient and delivered better quality.
However, leading brands like Toyota can produce vehicles for thousands less than their U.S. counterparts. It wasn't because Japanese labor is cheaper or they use robots -- it was the other reason they opened up American assembly lines.
Honda's Marysville, Ohio plant, which was the first Japanese-owned assembly facility in the area, had almost no warehouse space. Parts usually arrived from suppliers within an hour of being needed. Sometimes, the parts arrived from suppliers in exactly the same order as they would be used.
This means that plants are smaller and easier to maintain and build. The industry has billions of dollars less inventory. Professor of manufacturing at Harvard Business School, Willy Shih explained that if a defect is found, there are less bad parts available to repair or replace.
He said that "you catch problems sooner than you have a trainload to deal with," in a telephone interview.
According to Hinrichs, JIT and lean manufacturing were the most efficient way to produce goods until recently. This was before Henry Ford installed the first moving assembly line in 1913.
There were some glitches. Bad storms can disrupt the steady flow of trucks up to assembly plant loading docks. An accident at a supplier plant can cause havoc, as was the case in 2018, when Ford lost the magnesium crossbars it needed to make its F-150 pickups. The industry realized that it could only rely on one supplier in Japan to supply black pigment for its car paint after the 2011 tsunami.
However, the benefits outweigh any drawbacks.
Cole pointed out that these "Black Swan" unpredictable events have been increasing in frequency. The supply chain has been repeatedly disrupted by tornadoes, hurricanes, and blizzards as a result of climate change.
Covid-19 was then introduced. In spring 2020, North American auto manufacturing was shut down for three months due to the pandemic. Automakers and suppliers faced setbacks even after they were allowed to reopen. Still, the problem of illness-related shortages of manpower continues to be a problem. The pandemic caused a shortage of crucial semiconductor chips, which has led to production cuts at Toyota, Ford, GM, and others in recent weeks.
According to Detroit consulting firm AlixPartners, automakers lost $210 billion in 2021 revenues due just to semiconductor-related shortages, which will continue to hurt balance sheets this year.
Add to that the potential for global economic chaos if Russia invades Ukraine. Geopolitical problems don't always exist on the other side, as the border blockade this month demonstrated.
Cole stated that everyone is experiencing problems and warned that JIT production might need to be reconsidered.
Many industry executives, including Jim Farley, Ford CEO, have warned that the automotive manufacturing sector is facing serious challenges. However, most declined to speak on the topic, citing concerns about "competitive" issues.
Toyota was the only automaker to respond directly to questions. Last week, Toyota said that it had reduced its global production forecast for this quarter by almost 500,000 vehicles because of semiconductor shortages. Toyota is still analysing the effects of the Canadian trucker blocking order that briefly affected two U.S. plants as well as three others in Ontario. These factories were producing some of the most popular models of Toyota, the Lexus RX and the Toyota RAV4.
Toyota continues to face shortages at its North American plants due to a variety of supply chain, severe weather, and COVID related issues," this week's statement from the automaker read.
In an email, Ed Hellwig, a Toyota spokesperson, stated that the company is committed to continuous improvement and kaizen (the Japanese concept for continuous improvement). He also said that Toyota continues to examine its production processes in order find efficiency. It is crucial to maintain a resilient, efficient supply chain.
Despite the increasing number of problems in the auto industry, it is possible that there are no viable alternatives to JIT methods.
"Is JIT disappearing?" Dan Hearsch, AlixPartners managing director of the automotive and industrial practice, stated that he doesn't believe so. It is going to change.
Hearsch and Shih from Harvard Business School agreed that there are several major changes. They may also recommend increasing the inventory of auto plants and bringing back parts production in-house. Hearsch said that 3D printing technologies are being explored by the auto industry to be able to produce any part that is needed, without expensive tooling.
Automobile manufacturers are looking for ways to make their vehicles more flexible. Hearsch said that if the preferred semiconductor is not available, the automakers could switch to another chip and tweak the vehicle's software.
Hinrichs believes that automakers and other industries must find ways to stabilize it in the interim. Otherwise, the production disruptions of recent months could become more common.
The experts agree that there are a number of issues in the auto industry that raise serious concerns about both lean production and JIT production. They are not ready to give up.
Hinrichs stated that JIT is "the best system ever," even though it's not perfect. He said that there is no doubt that the industry was given a clear warning about the need to fix the system. He said that the disruptions in production we have been experiencing, and the shortages they cause at dealer lots, will "become more common."