For decades, companies have geared toward “efficiency” over business agility. They have been urged to do more with less, to value thinness above all else, but no company better exemplifies this principle than Toyota.
The concept of just-in-time manufacturing, in which suppliers deliver parts in days, or even hours, before they were needed, was what made Toyota an industry leader and established itself in the mind of a generation of business school students, the importance of executing thinness in their processes.
However, when the pandemic struck, it was not Toyota’s distinctive leanness that helped the company avoid the worst of damage. Quite the contrary: Toyota now does not foresee any short-term consequences for its business precisely because it has learned to reject the conventional wisdom it once embodied.
That lesson came in 2011, when a major earthquake and tsunami hit Japan and took key suppliers out of service for months, delaying Toyota’s production by roughly 760,000 vehicles worldwide. It took six months to get back to normal.
In the wake of that delay, the company took a look at its supply chain and drew up a list of priority items to store, not because it expected future disasters, but precisely because leaders realized they couldn’t predict what was happening. that could happen. Toyota learned to balance “just-in-time” with “just-in-case.”
That’s a lesson that companies across the landscape have learned over the past eighteen months. Between the Covid pandemic, geopolitical tensions threatening the global supply chain, and a new wave of catastrophic events caused by climate change (ranging from a deep freeze in Texas or a flood in NY, to a sandstorm that jammed a transport ship in the Suez Canal), we live in a time of uncertainty.
Forget the fortuitous “black swan”: our current landscape is dominated by a complete rout of them. That is not likely to change. We are likely to see more chaotic weather events, more international conflict and, yes, more disruption as a result of the pandemic.
After all, despite the success of vaccines in the developed world, Covid continues to rage in countries like India. And the after-effects of the demand shock are just beginning to manifest themselves.
One of those effects, the shortage of semiconductor chips, poses a particular danger to automakers, who are expected to lose more than $ 60 billion in revenue this year – the equivalent of 10 percent of global demand. Honda and Nissan expect to sell a quarter of a million fewer cars this year.
That’s why Toyota’s decision to stockpile, contrary to the “efficiency” doctrines of a decade ago, sounds like a smart insurance plan.
When the unpredictable is almost inevitable, what enables companies to survive in the long term is not thinness, but the ability to adapt to changing circumstances. In this age of uncertainty, agility is the new efficiency.
The American Eagle case
No one can predict the future; in fact, the challenge for business leaders today is to prepare for a future that will be defined by unpredictability. This dynamic is bringing back-office operations to the forefront, with companies struggling to incorporate flexibility into their operations.
Who was ahead of this wave is American Eagle Outfitters, a design-oriented retail company that owns all aspects of apparel design and manages supply from start to finish. When the pandemic struck, the company’s physical stores were forced to close and its e-commerce channels saw a sudden surge in demand, along with rising expectations for customer service. Instead of the usual bulk distribution to physical stores, the company faced the challenge of meeting an influx of small direct orders.
The implications for AEO’s supply chain were daunting, but the company was prepared. Long before the pandemic it had partnered with Coupa to reexamine its entire supply chain, using its Supply Chain App Studio to address legacy systems and processes and make better use of data when making key supply chain decisions.
When the pandemic began, the three-year plan he devised with Coupa could be implemented in just four months, supporting AEO’s shift to 100 percent e-commerce overnight, with the transformation of the supply chain from AEO, which facilitated inventory regionalization and reduced delivery times. The company was able to ease backlogs on Cyber Monday in just a few days, while other retailers struggled for weeks, and sped up job planning by 97 percent by replacing manual job planning spreadsheets with automated solutions.
Unfortunately, many companies in the S&P 500 still subscribe to the old conventional wisdom, clinging to an ingrained ideal of efficiency in reducing the number of people and keeping the slack in the system. It is no coincidence that many economists expect more than half of these companies to drop the list in the next decade.
Others will learn to adapt, taking a more holistic approach to efficient planning and building on their operations, the expectation of sudden change, and Coupa will continue to work alongside them to write a new playbook for the “new normal.”