In a world that is increasingly interdependent, what happens to one supplier can have ripple effects onto an entire multinational company. Thus every company lives in fear of the possibility of a blow-up crisis that paralyzes its entire operations. In 1997, that happened to Toyota. A fire broke out at the plant of one of Toyota’s suppliers, Aisin Seiki, the sole producer of the P-valve, which is a necessary component of Toyota’s cars, and almost brought the entire Toyota group to a grinding halt. But, in barely over a week, all of Toyota’s group assembly plants resumed operations, as over 200 suppliers stepped in to produce the vital parts that Aisin could no longer manufacture–a rapid recovery for such a large company.
How did Toyota’s supply chain recover so quickly?
Let’s look at the longstanding history and culture of its supplier ecosystem. The Japanese are known for long-term collaborative partnerships between firms and suppliers—Toyota is no exception. According to a MIT Sloan Management Review article, Toyota’s Just-in-Time (JIT) method of production — wherein products are created to meet demand and eliminate excess inventory–meant that each supplier had to work very closely together and communicate instantaneously, because they were effectively one link in a long, interdependent chain. The flexibility required for JIT meant that Toyota could not play a micro-managing role, which is why it chose to decentralize and distribute knowledge, providing firms with the tools and approaches to “self-organize in times of crisis and deal autonomously with emerging problems.” Problem-solving study groups, solutions-sharing and benchmarking studies are common practices within its supplier association.
The strength of their relationships and collaborative group norms allowed Toyota’s suppliers to respond nimbly after the fire occurred. For example, a key problem that they faced was that the P-valve required highly specialized equipment that most suppliers did not own. Aisin provided technical assistance, but it wasn’t accustomed to working without its machinery which was destroyed in the fire. As a result, most of the firms had to innovate and make decisions without step-by-step guidance, relying on their collaborative capacities to problem-solve together. Each firm had its own “emergency response unit” to coordinate production activities: when one of the suppliers outpaced the rest by generating a number of solutions, their solutions were quickly disseminated to all suppliers. Toyota played an enabling rather than an overseeing role in the process, and there was no haggling over technical rights or financial compensation, as firms trusted that they would be fairly compensated afterwards and that no one would steal proprietary secrets.
It boils down to freedom
Freedom is a key lens to understanding the successful turnaround of Toyota’s supply chain. The suppliers had “freedom from” centralized control and were able to act without much oversight. One of the criteria of freedom in the Freedom Index is whether supplier relationships are free from excessive oversight and regulations, and whether they are “free from” asymmetrical access to information where they are characterized instead by a transparent flow of information. In summary, the relationships were marked by freedom from top-down power dynamics.
But the suppliers also displayed a different and important kind of freedom: “freedom to.” They used their freedom to collaborate, to trust, and, in particular “to respond quickly to local conditions or economic fluctuations,” which is a criteria in the Freedom Index. “Freedom to,” broadly defined in the Freedom Report, “is a shared condition where [people] are capable of acting in the common interest.” This condition was perhaps most evident in the fact that after the crisis blew over, firms video-recorded their efforts to preserve “organizational memory” should a similar need arise again. In fact, after Toyota compensated its top tier suppliers for assisting during the emergency, those suppliers in turn compensated their suppliers in a similar manner. Such actions reveal a mindset that prioritizes the common good and that understands one’s wellbeing hinges on how well one manages one’s interdependent relationships. According to the report, this condition of “freedom to” only arises when there is “alignment toward shared objectives and mutually positive outcomes. It only occurs when strong missions and deeply ingrained shared values underpin relationships and inspire behaviors.” The trust-filled and mutually dependent relationships between suppliers and Toyota that were cultivated over the years provided both the “freedom from” and “freedom to” that enabled them to thrive in years of growth and to resiliently bounce back in times of crisis.