February 3, 2010
by Joel Sutherland
The ultimate impact of Toyota’s decision to suspend sales of eight of its most popular models and shut down production at six plants in the US and Canada depends to a large extent on the length of the shutdown.
Knowing Toyota, the company’s leaders have already planned its corrective action in detail, with expected lead-times for lines to reopen, even though they are not announcing specific details to the press.
While a good portion of Toyota’s component materials are procured from North America-based suppliers, the recall has a significant effect on the company’s global supply chain as well. Many of Toyota’s suppliers (such as Denso) have plants in the US but still source much of their raw materials and components/sub-assemblies from Asia and other locations.
In the world we live in today it is rare for a manufacturer of a product as complex as an automobile source all components and raw materials locally.
As a result, Toyota will need to deal with a number of global supply chain issues. It will have to manage firm orders already placed and in the pipeline, inventory piling up at suppliers’ plants and warehouses (and the resulting negative financial impact on those suppliers) and lost sales in the dealer network, to name a few. There will no doubt be a tremendous amount of negative PR that Toyota will need to address in order to avoid catastrophic sales losses.
This temporary shutdown will also affect the ocean, rail, truck and air carriers—not to mention other logistics service providers—that rely heavily on Toyota’s volume and throughput. As a result, these companies will find themselves with excess supply chain capacity and little chance to make up the loss.
Toyota is very loyal to its suppliers and will do everything possible to avoid putting them at risk. With the largest known stockpile of cash reserves of any global automaker, the company has deep pockets and will do whatever they can to ease the pain.
Here’s the bottom line: Despite Toyota’s rich resources and traditional prowess for planning, inventories will pile up throughout the supply chain, significant costs will be incurred and its long-standing reputation for quality will be tarnished.
Joel Sutherland is managing director of the Centre for Value Chain Research at Lehigh University in Bethlehem, Pennsylvania. He is a the former vice-president of operations at automobile parts manufacturer Denso.
Photo courtesy of Toyota Canada.