Here’s How Toyota’s Lean Logistics Helped the Company Recover Faster

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Japan was struck by a devastating tsunami in March 2011. The World Bank estimated the total economic cost  was $235 billion, and by that evaluation the tsunami was the most destructive natural disaster in history. The Japanese economy will be recovering for years, but despite the damage the country is still home to some of the top companies on the planet. Among them is Toyota (NYSE:TM), which has found a way to come back from the brink of collapse.

The damage suffered by Toyota is apparent in its financial results for the quarter ended June 30, 2011. Net revenues dropped 29.4 percent compared to the period in 2010. Operating income for the quarter came in at a loss of 108 billion yen ($1.3 billion), while net income dropped to 1.1 billion yen ($13.7 million).

Consolidated vehicle sales for the quarter totaled 1.2 million, a drop of 599,000. At the same time, the strength of the yen was growing to unprecedented levels, compounding issues related to the tsunami.

Following earnings were similarly grim, but each time the releases indicated that the company was competently working its way back to the top. The company’s stock on the NYSE hit a low near $60 per share in November 2011 before pulling itself back to current levels near $80 per share.

As with all automakers, Toyota has also been fighting an uphill battle against a catastrophic financial crisis and a tough global economy. To its credit, Toyota is pulling through and remains one of the most successful auto companies in the world. The reason, among other things, is Toyota’s “lean manufacturing” production system, which has helped keep costs low, and output high, and helped bring Toyota back into the green.

Toyota’s lean manufacturing system — or, the Toyota Production System — is the grandfather of more generalized lean manufacturing systems in place all over the world. Highlighted in the auto industry, lean manufacturing practices have reached as far as hospitals, where application of the system helped reduce the wait time for stroke patients by a third.

Studying the Toyota Production System — or philosophy, depending on who you ask — could take an infinite amount of time. Briefly, the idea is based on two principles: 1) quickly and clearly identifying and addressing problems, and 2) actively eliminating waste, inconsistency  and unreasonable requirements. Behind everything is the intention to identify root problems and eliminate waste.

Toyota’s application of this system on the assembly line speaks for itself. A Toyota factory in Mississippi can assemble 600 cars in a day. At full operational capacity, 2,000 total employees would build up to 200,000 cars a year. At any given moment, there are 550 people in the assembly shop. Toyota has wrung every iota of efficiency that they possibly could out of every movement involved in the production process.

Instead of assembly equipment dangling over head, equipment comes up from the floor, providing line of sight not found in many plants. The cars themselves are transported on a conveyor belt system. Tool and parts kits are exhaustively optimized.

It would take impossibly long to detail the thousands of ways in which Toyota optimizes their production. Lou Spagnoletta, a Toyota employee, sums it fairly nicely when he says, “You have a car in a smaller space and it takes less time to do the work.”

Toyota PriusThe system is obviously not perfect. Toyota has had to issue some pretty massive recalls in in the past few years, at least one of which was potentially seriously dangerous. The system did gain Toyota a sterling reputation until the series of setbacks happened, and as a result it’s likely to pressure the company into higher quality checks than ever.

Toyota’s lean manufacturing helped the company recover in a way that other auto makers probably couldn’t have. Toyota produces over half of its vehicles in Japan, and just over a year after the Tsunami, it is brushing the dust off its jacket. While production in the country dropped in 2011, Toyota was able to compensate by ramping up production at other plants across the world. Total production in 2011 still increased compared to 2010, and 2012 is trending higher.

At the end of October, Toyota announced that it sold 7.4 million vehicles in the first nine months of the year, 450,000 more than General Motors (NYSE:GM).

The company is facing a new challenge in China, where a territory dispute catalyzed a nearly 50 percent decrease in auto sales in the region for Japanese automakers. Toyota has announced that it will be scaling back on production in the region by 30 percent.

Because of the disturbance in China, Honda (NYSE:HMC) has lowered its profit forecast for the year by 20 percent. Nissan is expected to do the same thing. Meanwhile, in its second-quarter earnings release, Toyota increased its profit forecast by 2.6 percent.

Toyota’s lean manufacturing system has been its saving grace, providing strength and flexibility through intensely difficult times, and massive capacity in times of high demand.

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