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Seshadri: Toyota Recall Tests the Company's Legendary Supply Chain Process

Toyota Motor Corp. has announced a recall of eight models to fix a sticking pedal problem, which has affected hundreds of thousands of the company's constomers. Sridhar Seshadri (right), a professor in the McCombs School's Department of Information, Risk, and Operations Management, along with Ananth Iyer and Roy Vasher recently published, “Toyota’s Supply Chain Management: A Strategic Approach to Toyota's Renowned System.” Below, the authors discuss the current troubles at Toyota.

Toyota, the most venerable manufacturing corporation in the world, appears to have stumbled. Is this a simple misstep or is this a systematic failure? It is clear that Toyota thinks the problem is serious, judging by its decision to halt production and issue recalls across the board of RAV4, Corolla, Matrix, Avalon, Camry, Highlander, Tundra and Sequoia. They also claim to have identified the cause of the problem. Public reports identify a supplier in Indiana of brake pedals as the source for the defective parts.

In our book on Toyota, we identified five principles that drive supply chain design at Toyota: the choice of volume, variety, variability, velocity and the use of learning, or V4L for short. In addition, we devote a chapter that outlines Toyota’s crisis management process.

One wonders which of the V4L factors that have changed recently -- the sudden growth and swings in volume, rapid increase in variety offered beyond the vanilla Camry and Corolla, demand swings accompanied with significant pressures to stay profitable or the expansion of the workforce without a 100 percent adoption of the Toyota culture -- have resulted in stress on the supply chain.

In the early 2000s Toyota launched a significant drive to cut costs. It reported that substantial savings accrued when it reduced the variety of components. With reduced variety, a defect in a single component affects many assemblies and products. Did Toyota cut costs too much, leaving its supply chain out of tune on the V4Ls? How much responsibility was vested in suppliers, and did they have the capabilities? Should Toyota have developed a second supplier for such a key high-volume part?

Judging by its profits prior to 2007, Toyota had grown immensely profitable. In a similar situation in the mid-1990s, Toyota chiefs became wary of excessive profitability. They invested in the Prius project instead of resting on the laurels of having broken through to the larger car segment in the U.S. market. Did Toyota miss the early signs in 2007 of systemic imbalance? Are they outliers from which CEOs can learn about their system? Do windfall profits signal increase in risk and revenue without concurrent increase in necessary supply chain redesign expenses?

 If we have to make a prediction, the experienced Toyota would already have considered all this and will be preparing for consolidating across its brands and production lines. Notice that there is no “pointing of fingers” to assign blame but a concerted effort to accept the problem and fix it. We also anticipate that, similar to the heroic response to the Aisin Seiki fire in the past, the Toyota supply chain will rise to the challenge and fix the associated issues to maintain customer reputation for quality. We are confident that Toyota has a team of engineers on-site at the supplier plants to “work with” the supplier to resolve this problem quickly. One can also characterize their decision to halt sales as “stopping the line by pulling the cord,” until the root cause of the defects are identified. Perhaps a new balance of the 4 Vs and the continued supply chain leadership of Toyota will resolve the problem. If the legendary processes are adhered to, the outcomes will be as expected. What may need to change given Toyota’s global footprint is the need to allow organic and unplanned growth, and develop enough organization variety to cope with the changing world.

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