Business

NISSAN MOTOR COMPANY LTD.: BUILDING OPERATIONAL RESILIENCY William Schmidt, David Simchi-Levi

August 27, 2013 6

The Recovery Committee emphasized a few simple yet meaningful practices in coordinating the company’s response to the disaster:

1. Sharing information – Nissan brought all of their global regions into the response process. Management recognized that the non-Japanese operations would want information, but the effort to provide it would be a distraction to those on the ground handling the crisis. They also recognized information might be used selfishly by dependent facilities optimizing against its own needs. To address these two concerns, each region was asked to send two staff members to Japan to gather their own information and to help solve problems holistically. Instead of becoming a drain on the local response effort, the other regions and plants contributed to solutions. In addition, the regions had complete visibility into what was happening in Japan and could help the organization improve the response.

2. Allocating supply – Given the capacity constraints in the weeks and months after the disaster, and the dependencies that existed across the Nissan operational network, allocation of component parts was critical. The sales, marketing, and the regional supply chain management functions were brought together to identify how to globally allocate supplies to focus on highest margin goods. For example the supply of integrated Global Positioning System (GPS) units was constrained by the disaster. Nissan identified which car models required integrated GPS to meet customer demands, and allocated resources accordingly. Low-end models did not receive the allocation of available GPS since they did not have commensurately high margins, and customers were willing to purchase those models without an integrated GPS. This process was completed within two weeks of the earthquake and continually updated as the supply situation became clearer.

3. Managing production – Nissan slowed their production lines in a targeted way. Management closely considered in-stock and in-transit inventory within their network and slowed production upstream and downstream of anticipated bottlenecks. For example, the company was able to ramp down production, and thereby decrease costly overtime, for operations that were expected to be bottlenecked. Management also pulled vacation time into April and May in order to free up capacity later in the summer when upstream bottlenecks were projected to have cleared. The company used the time bought by having in-transit inventory to identify and implement supply alternatives. For example, the lead-time for ocean transport from Japan to the west coast of the United States was 15 days, plus five days to move material to plants in Tennessee and Mississippi. This meant that management had as many as 20 days to identify how to access alternative supplies of critical components. They were also able to secure air freight out of Japan so they could get critical parts out of the country faster and mitigate the reduction of in-transit stocks.

NISSAN MOTOR COMPANY LTD.: BUILDING OPERATIONAL RESILIENCY William Schmidt, David Simchi-Levi

August 27, 2013 7

4. Empowering action – Nissan emphasized rapid and flexible action. Management was

empowered to make decisions in the field without lengthy analysis from a central authority. To speed critical decision-making process on recovery-related issues, the company modified its delegation of authority rules for a limited period. The decisions were iterated upon as new information surfaced so that the company could course correct, if necessary. As Nissan’s Chief Operating Officer Toshiyuki Shiga explained,

The disaster response simulations we have carried out regularly served us particularly well. By envisioning a full range of potential situations arising from a major disaster and preparing for them, we successfully enabled ourselves to take prompt actions when the time came.

At a time of disaster, it is essential to make speedy decisions while grasping the latest situation, including details on employees’ safety and damage caused, and to take appropriate actions based on this. We launched the Global Disaster Control Headquarters just 15 minutes after the earthquake occurred. The team immediately gathered and assessed damage while overseeing restoration efforts at various facilities.24

Recovery by the Big Three Japanese Auto Manufacturers

In the six months following the earthquake, production across all auto manufacturers in Japan declined 24.3% compared to forecast.25 The big three Japanese manufacturers each contended with different issues associated with the disaster. Toyota had significant exposure due to its large size and its high rate of Japanese production (including for export). Nissan had several plants in close proximity to the disaster area. While Honda was partly insulated due to its large localized U.S. production, recovery from the disaster was still slow. Honda attributed its production problems to constraints in its supply chain,26 a problem that Nissan had successfully insulated itself from. As Nissan’s Chief Financial Officer Joseph Peter remarked,

Most of the steps we have taken in response to the March 11 disaster have been continuations of strategies, priorities and plans that were already in place. One example of this is the localization strategy we have been pursuing to better balance our manufacturing and sourcing footprint to our sales footprint. Our actions in this area date back to the start of the financial crisis in 2008, when our primary objectives were to reduce volatility from foreign currency movements, particularly the appreciating yen, and to reduce cost.27

24 Ibid. 25 “Japan Production by Month, 2005-2011,” WardsAuto Group, 2012. 26 Q2 2012 Honda Motor Co Ltd Earnings Presentation. 27 Ibid.

NISSAN MOTOR COMPANY LTD.: BUILDING OPERATIONAL RESILIENCY William Schmidt, David Simchi-Levi

August 27, 2013 8

Going Forward

In January 2012, Nissan announced that it would increase the localized production of its cars in the Americas from approximately 70% to 90% by 2015.28 The company also set aggressive targets to reduce its reliance on Japanese-made components in its foreign factories. For instance, the company was hoping to reduce the number of components brought in to North America from Japan by 50% by the end of fiscal 2013.29 The company, according to Peter, was also making a concerted effort to better understand critical dependencies that exist within its supply chain beyond the first tier of suppliers:

We are learning fresh lessons from the earthquake, too. Moving forward we will be modifying our purchasing process to enhance our business continuity plan at the parts level, particularly for critical components, and to mitigate potential supply risk concentration beyond the Tier 1 level. These are evolutionary kaizen changes, though, as opposed to fundamental shifts in our sourcing strategy.30

As COO Shiga pointed out, despite its preparedness, Nissan had work to do to be even better protected the next time disaster struck:

Many challenges still lie ahead. Some parts suppliers have yet to restore their operations. Our supply chain requires rehabilitation. This experience has instructed us in the necessity of an actionable BCP (business continuity plan) that encompasses all our suppliers, including those in the second and third tiers. Development of a more robust supply chain and comprehensive risk management are imperative in making our business more sustainable.31

Case Discussion Questions

1. The case identifies several aspects of the Nissan response that were particularly beneficial. Expand on the points made in the case to identify the potential costs and benefits of these actions.

2. What else could Nissan have done to prepare for and respond to the disaster? Try to articulate the costs and benefits of your suggestions.

3. What could Nissan have done to assess the risk of disruption in their supply chain? 4. How did Nissan’s product line strategy help or hurt its ability to respond to and recover from the

disaster?

28 Chester Dawson, “Nissan Aims to Boost North American Production,” The Wall Street Journal, January 9, 2012. 29 Ibid. 30 Ibid. 31 Ibid.

NISSAN MOTOR COMPANY LTD.: BUILDING OPERATIONAL RESILIENCY William Schmidt, David Simchi-Levi

August 27, 2013 9

5. How will the operational changes announced in 2012 affect Nissan’s exposure to future disruptions? How will it affect its steady-state operations? What trade-offs is management making and why?

NISSAN MOTOR COMPANY LTD.: BUILDING OPERATIONAL RESILIENCY William Schmidt, David Simchi-Levi

August 27, 2013 10

Exhibit 1 Production to Sales Ratios for Select Japanese OEMs

Source: Chester Dawson and Neal E. Boudette, “Too Big in Japan, Toyota Struggles,” Wall Street Journal, May 12, 2011.

Exhibit 2 Initial Damage Reports from Major Japanese Automotive OEMs

Company Damage  status Nissan  Motor ü Fires  broke  out  at  Tochigi  Factory  and  a  foundry  in  Iwaki

ü Damage  to  the  Tochigi  Factory,  Iwaki  Factory  (engines),  Yokohama   Factory  (engines,  etc.),  Oppama  Factory  and  Zama  Works  (lithium-­‐ion   batteries,  etc.)

ü It  will  take  some  time  before  the  Iwaki  Factory  is  repaired Toyota  Motor ü Partially  damaged  facilities  at  the  Iwate  Factory  (subsidiary  Kanto  Auto

Works),  Miyagi  Factory(subsidiary  Central  Motor),  and  Tohoku  Factory   (parts)

Honda  Motor ü Some  damage  in  to  facilities  in  Tochigi  Prefecture Mazda  Motor ü No  major  direct  impact Suzuki  Motor ü No  major  direct  impact

Source: Kohei Takahashi, “Autos and Auto Parts,” J.P. Morgan Equity Research, March 22, 2011.

NISSAN MOTOR COMPANY LTD.: BUILDING OPERATIONAL RESILIENCY William Schmidt, David Simchi-Levi

August 27, 2013 11

Exhibit 3 Select Nissan Financials, 2009-2011, (millions of yen)

2009 2010 2011 Revenue 8,436,974 7,517,277 8,773,093 Cost of Goods Sold 7,118,862 6,146,219 7,155,100 Gross Profit 1,318,112 1,371,058 1,617,993 Operating Expenses Sales, General & Administrative 1,456,033 1,059,449 1,080,526 Operating Income (137,921) 311,609 537,467 Net non-operating income (34,819) (103,862) 347 Net special gains (losses) (46,031) (66,127) (57,673) Earnings Before Taxes (218,771) 141,620 480,141 Total Income Taxes 36,938 91,540 132,127 Income (loss) attributable to minority interests (22,000) 7,690 28,793

Net Income (233,709) 42,390 319,221

Source: Nissan 2011 Annual Report.

Exhibit 4 Excerpts from Nissan 2010 Annual Report

Risk Management Measures & Actions (Related to Earthquakes) Nissan is assuming earthquake (EQ) as the most critical catastrophe. In case of EQ which intensity is 5-upper or over in Japan, First Response Team (organized by main functions of Global Disaster Headquarters) will gather information and decide actions to be taken based on the information. If necessary, Global Disaster Headquarters and Regional Disaster Headquarters are set up and gather information about employees’ safety and damage situation of facilities and work for business continuity. At the same time, efforts to develop Business Continuity Plan (BCP) are being done involving suppliers, such as, each and every function assessed its priority work, develop countermeasures to continue the priority works. BCP will be reviewed annually in the process of rotating PDCA cycle. Policy & Principle in Case of EQ

1. First priority on human’s life (Utilization of Employees’ safety confirmation system, EQ preparedness card to be carried on a daily basis)

2. Prevention of second disaster (In-house firefighting organization, stockpiling, provision of disaster information)

NISSAN MOTOR COMPANY LTD.: BUILDING OPERATIONAL RESILIENCY William Schmidt, David Simchi-Levi

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3. Speedy disaster recovery and business continuity (Measures for hardware, improvement of contingency plan and development of BCP)

4. Contribution to local society (cooperation / mutual aid with neighboring community, companies, local and central government)

Global Disaster Headquarters and Regional Disaster Headquarters conduct simulation training assuming large EQ to prepare catastrophe. The drill tests the effectiveness of this organization and contingency plan, and clarifies the issues to be improved. The contingency plan is reviewed based on the feedback. Nissan Global Headquarters Building where Global Disaster Headquarters is supposed to be set up (built in August 2009) has EQ resistant structure by vibration controlling brace damper. The safety is assured even in case of maximum level of EQ assumed at the site.

EQ: Earthquake

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