If you follow the auto industry, you might have seen headlines this week about how Toyota is being forced to shut down production in its Japanese factories next week (see one article, via Bloomberg). If you're a devotee of the Toyota Production System (aka “Lean“), you might start asking “why?” until you got a good answer.
Why are they shutting down production? Because they will run out of steel.Why? Because a steel supplier's plant is shut down. Why? Because there was an explosion there. Why? It's unclear, but it involves an employee re-lighting a pilot light.
On the question of why Toyota is running out of steel, you might ask, “Why don't they have “enough” inventory to keep running when something like this happens?”
Many news reports (like this one) point to the company's famed “just in time” (JIT) supply chain model, where Toyota works in close partnership with suppliers to keep inventory low through frequent deliveries, level production schedules, and other tactics and collaboration. The Wall Street Journal has long claimed that “lean production” or JIT is somehow proven to be ineffective because of occasional disasters like this. A “fat” production system with a lot of inventory brings its own risks and costs.
Commentators point out that Toyota would be able to keep production running if they had a warehouse full of parts — more inventory. Toyota (and every other modern automaker) has decided that the cost of holding lots of inventory over time (when there aren't disruptions) is far outweighed by the cost of the occasional production shutdown. It doesn't show a weakness in the JIT model, it shows that it's more complex and nuanced than simply getting rid of your inventory.
Think about hospitals and their adoption of Lean methods and philosophies. Lean and JIT doesn't mean we foolishly get rid of needed inventory and equipment. Lean means making sure you have the right resources available to do the right work the right way. Because healthcare has more variation in demand, compared to manufacturing, and can't level out production, that means keeping relatively more inventory on hand. The human cost of running out of a medication can be immeasurable. So, a hospital, compared to Toyota, would err on the side of keeping more inventory and making sure we don't run out (or at least that's what should happen).
The main lesson about how Toyota responds to a crisis like this isn't about inventory –Â it's about people.
Losing a week's worth of production in Japan means they won't build 80,000 vehicles, according to the Financial Times. That's a financial hit of $503 million in lost profits for Toyota. In a strong auto market, every unit of lost production means a lost sale. That production capacity and volume is lost forever. Those sales can't be made up.
These sorts of supply chain interruptions happen every few years. Almost five years ago, the massive earthquake that triggered tsunamis and led to the Fukushima nuclear power plant disaster disrupted auto production (which was, on many levels, the least of the world's worries at that moment).
An auto supplier in Japan was knocked offline, which affected Toyota plants in North America, and it affected General Motors. As I wrote about at the time:
“…GM responded by “temporarily laying off workers at a Buffalo, N.Y., engine plant.”
Many people would react and say, “Well, of course. GM was just being financially responsible and you don't need production workers if there's no work for them to do.”
Toyota, of course, thinks differently. I would fully expect that Toyota will not temporarily lay off employees in Ja pan next week. That has nothing to do with the Japanese business tradition of “lifetime employment.” It just makes good financial sense.
I did a Google search:
And it says “Missing: layoffs” under the results because that word doesn't appear in the articles. How appropriate.
How do I know Toyota will react this way? That's how they reacted in 2011. Again, while GM was temporarily laying off workers:
Toyota announced “officials say there will be no layoffs” at their plant in Ontario, Canada.
People might ask if Toyota is really that caring? Does Toyota have money to burn? Why would they not tell workers to stay home?
While GM was focused on saving money in the short term, Toyota is generally focused on the longer term perspective (as illustrated by point #1 of “The Toyota Way” philosophy and the idea of making decisions that are best for the long term, even at the expense of the short term).
You might say, “Well, GM was coming out of bankruptcy,” but at the time, in 2011, Toyota had about $38 billion of cash on hand and GM had $29 billion. It's hard to say that GM couldn't afford to continue paying people during the shutdown. They just chose not to.
That's the difference between seeing employees as a cost and treating them as a valued partner.
During and after the financial crisis of 2008, there weren't many cars and trucks being purchased, therefore many of the plants shut down. I blogged about it then.
At the San Antonio plant, as this article explains, Toyota invested in their employees and, therefore, in the future performance of the plant and the company.
What does Toyota get out of paying employees to come to work and not build cars, even for months at a time, as happened then?
During slow times, employees are paid for participating in “safety drills, productivity improvement exercises, presentations on material handling and workplace hazards, diversity and ethics classes, maintenance education and a stream of online tests to measure and record their skill improvements.”
They're also participating in “Kaizen,” the practice of engaging everybody in ongoing continuous improvement (see my blog post about an example of this at a Toyota plant in Japan). Toyota has also paid employees to participate in community service activities like Habitat for Humanity, which is a great way to build teamwork and leadership capabilities.
Toyota is placing a bet that continuing to pay people, in the short term, is not charitable, but rather something that pays off over time.
Think of the impact on employee morale and loyalty and what that is worth to a company in terms of increased productivity, lower turnover, and increased participation in continuous improvement efforts. At a fully-burdened cost of $60 an hour, paying 3,000 workers to not work for a week costs $7.2 million. Toyota's experience with investing in people means they think this is a pretty safe bet and I'm sure it's the bet they will be placing next week in Japan.
It's something to think about in healthcare, even. If a car factory can make the choice to invest in people instead of laying them off for months, can't a hospital make the choice to invest in nurses and continuous improvement activities instead of “flexing” and send them home a few hours early? See my recent blog post about this practice and how “flexing” isn't Lean.
We know how much money is saved by sending nurses home early. But, do we know how much it costs us in the long term?
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