Risk Management: Toyota - Case Study Example

Risk management On the day that the Tsunami hit the Coast of the Japan Islands, nobody expected the devastating effects that resulted. It was a disaster that was beyond anyone’s expectation of prediction. Lives were lost, and many companies local and global experienced unexplained losses that to date remain one of the worst ever experienced. It was the moral duty of the companies to rise again after the loss and come up with measures that could manage the risks of loss both in the short term and long term. One such company that successfully got up and moved on stronger, which is the focus of this case study is Toyota. Toyota is a global leading automotive manufacturing company that has its original home in Japan. Currently, the company has outlets and factories in major cities all over the world including America and some European countries. On the 11th day of March 2011, the greatest earthquake from the Indian Ocean hit the East coast of Japan Islands. What resulted was massive flooding in the water-surrounded mainland of Japan. The flooding occurred with such force that the many could not withstand. The loss of life and destruction of property that resulted was unthinkable. Toyota Company is one of the largest companies in Japan, with more than 500 Tier 1 automobile suppliers in Japan alone. The flooding resulted to loss of lives of most of its workers who were on duty. The water swept away machines and the vehicle parts and finished cars that were in the company were lost. The economic effect of this event remains unaccounted for, but the company has put in place risk management measures to mitigate future losses. Short-term responses The effects of this event led to the company undertaking serious risk management measures. The measures were first to control further and extensive losses from the aftermath effects of the Tsunami and second to ensure such an event in the future does not cause as much loss. As part of the short-term measures, the company held several meetings for all its general managers from all the plants in the country. The initial priorities in these meetings were to take care of all the Toyota team members in all the plants to ensure they are ready to bounce back to business. The second priority was to ensure that the community around the plants is taken care of and served by the team members as part of the corporate social responsibility. As this was happening, the cooperation of engineers, equipment vendors and suppliers were aimed at bringing the company back and get all the parts and departments running again. These concerted efforts were boosted by the government which helped in the organization and the material and experts support to the community. Cleaning-up of plants was done immediately after the water had settled, and rebuilding began instantly. By June the same year, only three months after the event, 90% of the destroyed parts were already functional. Long-term responses The long-term response of Toyota can be explained by pointing out three major components of risk management plan that the company undertook. Firstly, the company started the standardization of vehicle parts across major Japanese automakers. This was done for those parts that are at a higher risk of production disruption. This was important to ensure collaboration with the other companies and hence reduce the probability of a complete loss in case of a risk. Secondly, the company influenced the lower-tier suppliers of parts to ensure they hold at least several months’ worth safety stock. This was encouraged for the specific parts that the company could not standardize. This was a great strategy, although cost incurring. The safety stock was to be stored in warehouses in areas that the company recognized as less earthquake prone. Thirdly, the company initiated a strategy to catalogue the regions in the country depending on their proneness to earthquake. Each of the regions was to have an independent supply strategy. This was to ensure that in the future, an earthquake would not affect production across all the regions. The company, from this event, started having local outlets in other regions such as in America source their materials from within the countries or produce their own to reduce the risk (Ferrari). The outcome of the changes Due to these measures taken by the company as a result of the events, there were various levels of outcomes that were witnessed. Economically, the company experienced losses due to reduced production in the plants that took long to get flowing again. The economic impact was also experienced in relation to the repair and re-building work that followed as well as the compensation of the lower-tier suppliers who were producing the safety stock parts. Socially, the response to the disaster that was witnessed in the company enhanced the positive outlook of the company among the communities and government. This is especially after the efforts of the company to help the communities recover after a disaster. Procedurally and in the production area, there were changes in the production limits and specifications in most of the company’s plants in line with the long-term risk management measures. The company culture also experienced changes. First, decentralization of production and increased collaborations were allowed for the first time. This was a measure to spread risk and ensure that the company does not lose all its operations in case of a similar event. Lesson learnt from the events and the response Given the scale of the risk associated and the response that the company adopted to ensure that the risks were managed, there are lessons that can be learnt. The key lessons learnt are visibility, flexibility, collaboration, control and looking forward. In the visibility, the company ability to track and monitor the events that occurred and the pattern in which they happened in required to address the issues related to disasters (Hallikas et al., pp. 47-58). Toyota Company was able to track the events of the tsunami and come up with measures to ensure that a repeat of the unpredictable will not result to massive losses and closure of main plants in the company. On the flexibility, the extent to which a company adapts promptly to problems without having to increase the expenses. Decentralization of operations exercised by the company is an example of flexibility. It ensures that the company recovers from the losses fast and can prevent future losses. Regarding the collaboration, it is a requirement that the risk is spread. In some cases, diversification as a measure to spread risk is not possible. The possible means to achieve this is to initiate collaborations with other companies within the same industry with the aim of bringing together efforts to prevent losses and making it easy to recover and obtain support (Tang, p. 485). Partnership helps protect and avoid disruption of common goals. Another lesson relates to taking control of situations in case of a risky situation. This involves having clear and well defined policies, and mechanisms to control and monitor risks. It was the ability of Toyota Company to take charge of the situation that led to a quick return to functionality and maintained operations. It is also out of control that the company was able to act and establish collaborations with like companies and establish procedures to manage risks. Lastly, another lesson learnt from these responses is the importance of having the ability to look forward and establish strategies that will reduce the negative effects and risks (Rampini, Sufi, and Viswanathan, pp. 271-296). It also ensures that the company can manage different levels of risks related or unrelated to the current situation. The decentralization of some operations and the cataloguing of regions to ensure production is not interrupted and operations are not affected by ant events in the future is a long-term response. The response ensures that the company is looking forward to ensuring that its operations are securely running even in the event of a risk. Works cited Ferrari B, “Toyota Should be Praised for an Active Supply Chain Risk Management Plan” The Ferrari Group Sep 14, 2011, http://www.theferrarigroup.com/supply-chain-matters/2011/09/14/toyota-should-be-praised-for-an-active-supply-chain-risk-management-plan/ Hallikas, Jukka et al. “Risk Management Processes in Supplier Networks.” International Journal of Production Economics 90 (2004): 47–58. Rampini, Adriano A., Amir Sufi, and S. Viswanathan. “Dynamic Risk Management.” Journal of Financial Economics 111 (2014): 271–296. Tang, Christopher S. “Perspectives in Supply Chain Risk Management.” International Journal of Production Economics 2006 : 451–488. Toyota after the Tsunami. http://www.produktion.de/toyota-after-the-tsunami/ Read More