Global Logistics-Jan 2007

Following nearly 15 years of fiscal sputtering, Japan’s economic engine is now shifting into drive.

For a country whose automobile manufacturing sector established itself as the vanguard for just-in-time manufacturing and logistics in the 1970s, it is not surprising the government has taken a page out of its own supply chain legacy to fuel economic growth and prosperity at home.

As recently as 2002, Japan was still mired in the wake of its late-1980s bubble burst, when skyrocketing stock and real estate prices precipitated over-investment and sent the financial sector—and every industry tied to it—spiraling into an unprecedented economic collapse.

Japan’s long-admired keiretsu, or “management by consensus” approach exacerbated this recession as banks brought vested suppliers, manufacturers, and distributors down with them.

Unavoidable fiscal contraction beset Japan’s economy for the remainder of the 1990s and into the new millennium, when the global downturn further confounded government efforts to stimulate industrial growth.

In the time since, however, Japan’s economy has tilted in a positive direction thanks in part to growing export demand for automobiles and electronics, strong capital investment, a growing consumer market, and its highly developed logistics and transportation footprint.

LOGISTICS EXCELLENCE PAVES PATH FOR PROGRESS

Akin to other developed countries, Japan has recently experienced a loss of manufacturing activity to less expensive offshore markets. This loss in manufacturing capacity, however, paved the way for further growth in Japan’s logistics and transportation sectors.

Japan lays claim to one of the more developed transportation networks in the world, which, given its proximity to China and other burgeoning Asian markets, makes it an ideal distribution crossroads.

The country has six ports among the top 50 worldwide in total cargo volume, and six among the top 50 in container volume, according to the American Association of Port Authorities. It also has a strong airfreight sector—Airports Council International ranks Tokyo Narita fourth globally in total airfreight tonnage, while Osaka Kansai and Tokyo Haneda also rank among the top 25 global airports.

“Japan’s infrastructure is well-positioned for sourcing raw materials and finished goods from China,” says John Caltagirone, vice president and global practice leader for supply chain strategy, The Revere Group, a Chicago-based global business consultancy.

Japan is trying to link more of its roads with Tokyo and other cities to provide better access to its ports and airports—a shift in focus that reflects a worldwide trend.

“Japan is diversifying its port infrastructure, developing smaller ports to assist the bigger ones, and facilitating distribution with better accessibility. This setup helps eliminate commercial bottlenecks,” Caltagirone explains.

Japan’s consumer market also has great bearing on the evolution of its logistics capabilities.

“Japanese consumers demand a variety of the latest products. Anyone who has visited a Japanese retail store can attest to a vast selection of products with the latest technology and features,” writes Toshiyuki Kitamura, Toyota Motor Sales, in Global Perspectives: Japan, a special report on Japan’s supply chain environment written for the Council of Supply Chain Management Professionals.

With product lines long on diversification and short on time to market, Japan maintains a high-variety, low-volume consumer market, says Kitamura.

“These requirements have forced Japanese companies to emphasize short lead times to consumers, and to not only meet changing customer preferences, but also reduce inventory and minimize obsolescence,” he explains.

Just-in-time, reduced inventory strategies are nothing new to Japanese companies. Toyota brought terms such as kaizen, jidoka, and heijunka to logistics vernacular, and the Toyota Production System (TPS)—which incorporates all three concepts—remains the envy of reduced-inventory wannabes around the world (see sidebar, below).

Shifting social demographics and an equal export/import balance sheet have placed an even greater premium on supply chain processes that sync with demand signals.

“The current trend in Japan is a shift toward consumer-driven logistics—using IT to obtain actual customer orders and help the supply chain meet its goals,” says Kitamura.

LINGERING OBSTACLES

Despite this legacy, globalization has exposed some logistics pain points for Japan, blistered by years of industry contraction and government passivity.

The 3PL concept, for example, is still new to Japanese industry, and residual traces of keiretsu have made companies wary of outsourcing logistics functions to third parties outside their collective fold.

One caveat exists. “As long as Japanese companies are working with other Japanese companies, they are less resistant to outsourcing,” Caltagirone says.

Increasing consumption in Asia has similarly opened up new distribution and trade streams in countries such as Singapore, Thailand, Korea, and Vietnam that may threaten cargo traffic into and out of Japanese ports.

“While smaller, less congested Japanese ports have redistributed and retained volume, containers no longer travel through major Japanese hubs. Some fear that Japan’s major hubs may not be able to compete with other Asian hubs, ultimately hurting Japanese competitiveness in the global economy,” says Kitamura.

More recently, the Japanese Cabinet Office reported that while the economy continues its recovery, consumption weakened. Among its findings:

• Corporate profits are improving and business investment is increasing.
• Employment is improving on a broader basis, though some severe aspects remain.
• Private consumption is almost flat.
• Exports are leveling off and industrial production is increasing moderately.

The report reinforces the need for both government and the financial sector to commit to budget and management reform. Japanese industry must similarly reevaluate its pay structure to lure development investment and stimulate consumer spending, Caltagirone cautions.

Inevitably, with progress comes growing pains, but Japanese government and industry have been increasingly proactive in stimulating economic activity and investing in capital infrastructure.

“Further economic reforms will also help reduce costs and stimulate more rapid productivity growth. There is considerable uncertainty on this point as the political costs of reform remain high.

“Still, Japan’s outlook seems better today than at any time in the last two decades,” writes Ira Kalish, director, global economics and consumer business at Deloitte Research, in his Global Economic Outlook 2007 report.

But the real driver of Japan’s current economic spurt may be its penchant for supply chain process improvement.

“The Japanese excel in terms of quality and lean processes. They can extract every nickel and dime out of cost structures, and this bodes well for businesses that seek product distribution or finished goods manufacturing in Japan,” Caltagirone notes.

TECHNOLOGY PAYS OFF

Japan has also been proactively investing in and applying cutting-edge information technology, which dovetails well with streamlining processes.

“Japanese companies receive credit for pushing technology because their processes are finely tuned. They have spent so much time and effort on discipline and procedure in their supply chains that when they apply technology the process is much better,” Caltagirone adds.

So is Japan’s economy. Now approaching five years of positive growth and economic recovery, and with a government encouraging businesses to invest in infrastructure and technology, the horizon looks bright.

Perhaps the only question worth asking is: why is this happening now and not 10 years ago? Caltagirone has an answer: “Now Japan can see it is a global power and it wants to be number one. The government recognizes this fact and has become less bureaucratic and more supportive,” he suggests.

With the ghosts of its economic collapse still present, the expectation is that Japan will track a course of measured and sustainable economic growth and continuous improvement. Its pedigree for logistics excellence may yet prove to be a major thrust in its rise from the ruins of economic catastrophe to an esteem more becoming of the world’s third-largest economy.

Long a symbol of Japan’s leadership in logistics and supply chain best practices, the Toyota Production System (TPS) stresses the importance of continuous improvement (kaizen); and of matching supply to demand to reduce inventory, eliminate waste, and ultimately lean the supply chain from supplier to consumer.

As Japan embarks on a new age of global trade, aspects of TPS inevitably surface in the growth of industry, given the increasing importance of lean supply chain management and demand-driven logistics.

Here is an overview of the core tenets of Toyota’s lean philosophy:

THE FOUNDATION

Heijunka: An approach to level production throughout the supply chain to match the planned rate of end-product sales.

Kaizen: A Japanese term for continuing improvement involving both managers and workers. In manufacturing, kaizen relates to finding and eliminating waste in machinery, labor, or production methods.

THE LEFT PILLAR

Just In Time (JIT): An inventory system that controls material flow into assembly and manufacturing plants by coordinating demand and supply to the point where desired materials arrive just in time for use. JIT is also an inventory reduction strategy that feeds production lines with products delivered just in time. Developed by the auto industry, it refers to shipping goods in smaller, more frequent lots.

THE RIGHT PILLAR

Jidoka: The concept of adding an element of human judgment to automated equipment. In doing this, the equipment becomes capable of discriminating against unacceptable quality, and the automated process becomes more reliable.

Population: 127,463,611

Total area: 377,835 square kilometers (slightly smaller than California)

Natural resources: Negligible mineral resources, fish

Government: Constitutional monarchy with a parliamentary government

GDP (2004): purchasing power parity: $4.025 trillion—#3 globally per capita: $31,600—#20 globally

Industries: Japan is among the world’s largest and most technologically advanced producers of motor vehicles, electronic equipment, machine tools, steel and nonferrous metals, ships, chemicals, textiles, and processed foods.

Exports (2004): $550.5 billion—from transport equipment, motor vehicles, semiconductors, electrical machinery, and chemicals

Imports (2004): $451.1 billion—from machinery and equipment, fuels, food, chemicals, textiles, and raw materials

Top export trade partners: United States, China, South Korea, Taiwan, Hong Kong

Top import trade partners: China, United States, Saudi Arabia, United Arab Emirates, Australia, South Korea, Indonesia