COVID flipped the auto industry’s ‘just in time’ approach to car manufacturing on its head
Toyota is stockpiling parts. Yes, you read that correctly. The auto manufacturer famous for its “just in time,” approach to car assembly has shifted gears, with COVID-19 disrupting supply chains around the world and leaving manufacturers in limbo.
The global health crisis has exposed what can happen to a supply chain when an unexpected disaster hits and inspired new lines of thinking when it comes to having parts at the ready.
Just in time
Toyota adopted the just-in-time (JIT) approach back in 1970 as a way to minimize the amount of inventory the company needed to have on hand, which would in turn increase efficiency.
For JIT to work, however, all systems need to be functioning properly. Broken down machines, unreliable suppliers, low-quality workers, and a litany of other issues can turn the system on its head, but it has generally been a success and, ultimately, widely adopted.
“The just-in-time model is designed for supply-chain efficiencies and economies of scale,” Ashwani Gupta, Nissan Motor Co.’s chief operating officer, told The Wall Street Journal. “The repercussions of an unprecedented crisis like COVID highlight the fragility of our supply-chain model.”
The main benefit of JIT is that a manufacturer won’t have to pay storage costs and isn’t left footing the bill, so to speak, if an order gets canceled early in the purchase process.
Toyota didn’t factor in, however, what could happen if a bigger issue than a broken machine or having an unreliable supplier occurred. What about if the entire world shuts down?
It hasn’t been good.
“The pandemic has just changed the game,” David Cole, chairman-emeritus of the Center for Automotive Research, told NBC News.
Out of chips
The main cause of auto manufacturing setbacks in COVID-times is due to a global shortage of semiconductor chips integral to the car-building process.
Ford, as one example, has been hit especially hard, and has said it expects to miss out on $2.5 billion in profit with production dropping by just over 1 million units.
Jochen Hanebeck, operations chief for German semiconductor company Infineon, said the chip shortage is expected to last all the way until 2023.
“The situation will be tight in 2022,” Hanebeck told Fortune. “The foundries are investing now, but the lead times to get this new capacity will be easily into 2023.”
Infineon is the leading supplier of microchips to the auto industry on the globe, shipping around 13% of a $35 billion global market to car manufacturers.
A large part of the problem is the chips have a wide variety of uses, ranging from cellular phones, computers, laptops, and other everyday items.
“We’re fighting for every wafer,” Infineon Chief Executive Reinhard Ploss told Fortune. “This couldn’t have come at a worse time.”
Less is more
In general, a vehicle retailer will want to have around 60 to 70 days’ worth of inventory on stock at any given time. However, during the pandemic, research firm J.D. Power found car dealers were shorted, with around 1 million fewer cars on hand than normal.
Toyota, at one point early this year, reported it was down to less than 10 days’ supply of some of its more popular inventory.
While expectations vary when you head abroad, in America drivers expect to cruise off in their new vehicle the same day they purchase it.
Now, with an industry known for being a well-oiled machine stuck in a logjam with no clear end on the horizon, patience has become key.
“Buyers were willing to wait,” said Mike Jackson, CEO of AutoNation, in an interview with NBC News.
AutoNation is currently the largest auto retail chain in the U.S., and Jackson, for his part, said a real issue is how car showrooms have been overstocked in the first place, calling it “ruinous.”
So, in a way, the inability to pump out new vehicles has been a bit of a reprieve, for dealers at least.
Additionally, J.D. Power has found that prospective buyers are less likely to demand a discount or look for the best possible deal as the pandemic subsides and the full measure of supply chain disruption becomes clear.
“We’ll never go back to levels of inventory we had pre-pandemic because we’ve learned we can be much more efficient,” GM Chairman and CEO Mary Barra said during an earnings call reported by NBC News.
For the time being, however, inventory within the factories themselves is rising, on account of the need to stockpile parts, since there are no certainties that manufacturers will be able to get them at a later date or in a timely fashion.
With car orders backlogged and an anxious public waiting for their purchases, manufacturers will continue to look for ways to maximize efficiency moving forward, and without having to rely so much on outside suppliers having critical parts at a moment’s notice.
“We have to set up a more resilient supply chain, (one) not only coming from Asia or the U.S., that’s for sure,” said Nikolai Ardey, head of group innovation at Volkswagen, during an event reported on by Fortune. “We have to step by step develop our own.”
In other words: Time’s up.