Question 1: Define one problem statement for this case study.

Question 2: Define current state and take out Root cause analysis for the problem statement.

HONDA CANADA (A): TSUNAMI AND COMMUNICATIONS

It was mid-March 2011. It had been three days since an earthquake had hit Japan, followed by a tsunami and a nuclear meltdown. The triple disaster had been billed as a Black Swan event.¹ The magnitude of the earthquake at 8.9 on the Richter scale, the height of the tsunami surging inland at 30 metres above sea level, and the resulting nuclear meltdown at level seven were unprecedented.²

At his office in Markham, a suburb of Toronto, Canada, 10,000 kilometres from the epicentre of the calamity, David Gardner, vice-president (sales and marketing) of Honda Canada, was assessing the impact on local operations. Jerry Chenkin, the executive vice-president of Honda Canada and Gardner's immediate boss, was away in Hong Kong with a delegation of Acura dealers.

The instinctive take of both Chenkin and Gardner on the news unfolding on television screens was that the impact would be minimal because 91 per cent of Honda vehicles sold in Canada were produced locally, in North America. Their focus had therefore shifted to mobilizing help for victims in Japan. Contact was established with the Canadian Red Cross to set up a portal to facilitate the company's associates and dealers to contribute to relief efforts in Japan.

Within two days, however, the disaster had hit home. Honda Canada's sales and production planning unit got wind of it first, on realizing that components such as electronic control units were being sourced from Japanese companies located in the quake zone, 400 kilometres northeast of Tokyo. The components were critical to assembly; but, more importantly, Honda Canada had no alternative supply sources.

The natural disaster had obliterated several sub-contractors, eliminating supply sources for many industries. For Honda Canada, its supply chain was disintegrating at a time when it was trying to get back to its record sales level of 171,400 units of Honda and Acura vehicles in 2008. It had sold only 141,100 units in 2010; and the first two months of 2011 had not been good either. The company had been hoping for a busy spring

sales season, and that the imminent release of the all-new 2012 edition of its best-selling brand, the Honda Civic, would kick-start sales growth in 2012 but then the natural disaster had hit Japan.

Preliminary estimates suggested that, given the supply shortages of critical components, North American Honda factories would be able to deliver, over the next 90 days, only a fraction of their scheduled output. To deal with the contingency, Honda Canada quickly set up its emergency task force (ETF), a 10-member committee headed by Gardner (see Exhibit 1).

Gardner said:

The imminent scaling down of output would affect employees, dealers, and customers of Honda Canada in different ways. We are facing three dilemmas at the ETF. First, how do we give an honest assessment of the situation to employees, numbering approximately 4,000 in manufacturing and 15,000 in sales Canada-wide, without creating panic? We need to empower the frontline staff to better react, in turn, to dealers and customers. Second, how do we ensure that the company's approximately 300 Canadian dealers, some of whom also sell competitor vehicles, continue to stay focused on Honda? Dealers have varied sources of income like used car sales, spare parts, and services, but the new vehicle sale is their oxygen. Third, how do we sustain our commitment on delivery times to Canadian customers? We need to retain their loyalty in a competitive market. How do we communicate with them? What do we tell them?

AUTOMOTIVE INDUSTRY

Three trends pointed to a shift in the balance of power within the global automotive industry in the recent past. Toyota had overtaken GM as the world's largest automotive company by sales in 2007. China had become the world's biggest auto producer and also the biggest auto market in 2009. The Asia-Pacific region had become the world's fastest-growing automotive market in 2010.

In Canada, GM, Ford and Chrysler known in the global auto industry as the Big Three together accounted for 46.1 per cent of motor vehicle sales in 2010, while the Japanese companies together accounted for 33.5 per cent. Honda was the second-largest Japanese company in Canada, with a 9.1 per cent market share in 2010, following Toyota at 11 per cent.³

North America had ruled the automotive market for decades. But in 2010, out of estimated global sales of

57.1 million units of cars and light trucks for the year, Asia accounted for 39.3 per cent, while North America accounted for 24.3 per cent (see Exhibit 2). New car sales in the BRIC economies (comprising Brazil, Russia, India, and China) had surpassed the combined sales of Western Europe and Japan, accounting for nearly 30 per cent of global car sales. While Chinese and Indian automakers pursued overseas acquisitions, global automakers were setting up research and development (R&D) centres in China and India, in a bid to understand local markets.

The industry was on the verge of recovery from the slowdown in demand following the 2007 financial meltdown. The recovery was being led by Asian economies. Several factors had triggered the recovery worldwide economic stimulus programs from national governments, low interest rates set by central banks, and easier terms of lending to the automotive industry by commercial banks.

A major trend was the diversity of the locations of global automotive production, which had originated in the aftermath of the international oil crisis in 1973. The fuel efficiency of their cars had propelled Japanese auto companies to set up manufacturing facilities in the United States in an effort to be closer to customers. Over time, they had gone increasingly global in terms of manufacturing and supply chains. The procurement of parts and components was often centralized to secure global efficiencies.

During the 1990s, Japanese auto companies had also dispersed, even within Asia and the Oceanic region (comprising Australia and New Zealand). They had set up production facilities in countries closer to home, such as in China, with sizable inputs of specialized components imported from Japan. A survey by the Japan External Trade Organization, a non-profit, government-funded organization that promoted Japanese exports abroad, had pointed out that approximately 40 per cent of the raw materials and parts procured by Japanese motor vehicle affiliates in Asia and Oceania were being sourced from Japan.⁴

A major characteristic of the automotive industry was that the number of stock-keeping units was considerable. A typical motor vehicle comprised more than 15,000 parts.⁵ The lack of a single vital part could slow the progress of an assembly line.

Gardner said:

Auto companies have calibrated their supply chains so tightly, in pursuit of operational efficiencies, as to leave little buffer room. Consider this scenario: A sub-contractor of a sub- contractor in Japan makes a particular part which is sent to an original equipment manufacturer in Thailand who combines multiple parts into an assembly which eventually finds its way, just in time, to a production facility somewhere in the world to become part of a vehicle moving down a line in an orderly manner. Sub-contracting is common because everyone in the supply chain is operating on thin margins and tight schedules. In a competitive race to provide better quality at lower prices, auto companies have settled down into slender and highly optimized supply chains. It is very common for them to depend on a solitary supplier who delivers the best product at the lowest price.

The growing influence of dispersed supply chains had led to two consequences. First, under pressure to continuously cut costs and optimize production and delivery systems, contractors and sub-contractors were focused on serving niches. As a result, a company that in the past had produced a specific auto part now made one component of that part, and passed it on to another supplier in a different country for additional assembly. One small piece could thus pass through multiple suppliers in many countries before it arrived at the final assembler just in time. Second, since bits and pieces of value were being added here and there, it was very difficult to identify the country of origin. Many factories had little idea of the origin of the parts and components they bought. The traceability of lower-tier suppliers was difficult. In any event, figuring it out was costly and, in normal times, unnecessary.

DAVID GARDNER

As vice-president (sales and marketing), Gardner was responsible for the day-to-day operations of such Honda Canada business divisions as automobile, motorcycle, power equipment, and parts & service

operation. He had begun his career in the company in 1989 as district sales manager in the Central Zone office. He had since held positions such as zone manager of the Central Zone, national sales manager for Honda and Acura, and assistant vice president of Acura. This diverse background gave Gardner a good understanding of the three different viewpoints of the business: the national head office (where planning and strategy was primarily developed), field operations (where Honda and dealership associates executed the plans), and dealership operations (where the majority of the customer contact took place). Gardner commented:

Working in the national office is quite different from field operations or dealership operations because you are immersed in what we call "The Honda Way." Canadian and Japanese associates work side by side on all areas of the business and, as you can imagine, it can be difficult for the Japanese associates to follow our conversations in English all day long. It can be difficult, tiring and hard to make sure that there is a common comprehension of the issues. It's the same in reverse for our Canadian associates when we are listening to content which is translated during meetings. We have to make sure we can understand one another and are on the same page.

In response to the disaster, Gardner said, "Our first reaction had nothing to do with business. When a disaster strikes, your first concern is for the people, the ones you know personally. There were also a few Canadian associates who were on business trips in Japan."

HONDA COMPANY BACKGROUND

Honda was set up in September 1948 by Soichiro Honda in Hamamatsu city in Shizuoka province, with capital of 1 million.⁶ The objective was to produce motorcycles and build the company into the world's top motorcycle maker. Over time, the company had diversified into other categories such as cars and power equipment.

Honda Motor Company had consolidated revenue of US$107.5 billion⁷ (8.9 trillion) and operating income of US$6.8 billion (569.8 billion) for the year ending March 2011. It had 179,060 employees in 60 countries.⁸ The company was driven by the vision of providing personal mobility to individual consumers. The vision was being realized through a six-fold strategy:

• Introducing value-added products through innovative R&D
• Securing production efficiencies by enhancing flexible manufacturing systems at global facilities
• Achieving sales efficiencies by upgrading customer service
• Improving product quality in response to customer demand
• Developing technologies to improve traffic safety in motorized societies
• Creating a cleaner and better environment⁹

Honda had four business segments: automobiles, motorcycles, financial services, and power products, which, in 2010, generated 76 per cent, 14.4 per cent, 6.2 per cent, and 3.4 per cent of revenues, respectively. The company had five geographical segments: North America (44 per cent), Asia (20.7 per cent), Japan (16.8 per cent), Europe (6.8 per cent), and other regions (11.7 per cent).

Honda was developing automobile products aimed at specific niches. Its motorcycles, for example, were being targeted at "commuter" types who sought basic transportation and "fun" types who rode them for the joy and pleasure of riding. The features, and the prices, varied.

HONDA CANADA

Honda Canada ranked second among Japanese automotive companies operating in Canada (see Exhibit 3). As of 2011, the company had invested more than CA$2.2 billion in Canada, where, in 1986, it had set up, in Alliston, Ontario, an assembly plant known as Honda of Canada Manufacturing. Starting with the production of the Honda Accord, Honda had shifted production in 1988 to manufacture the Honda Civic. A second automotive factory had been built in 1998 to manufacture the Honda Odyssey in the same premises. Honda had also opened an engine plant in September 2008 to manufacture engines for delivery to automobile factories. Honda had the annual capacity to build 390,000 cars and trucks and 200,000 engines. The vehicles produced at the Alliston plant were sold in Canada and also exported to the United States.

Honda Canada was sourcing nearly CA$1.1 billion in goods and services from Canadian suppliers annually. Its Civic brand had been the top-selling passenger car in Canada since 1998. All Civics sold in Canada, except the Civic Hybrid, were built locally. Said Gardner:

The Alliston plant has a four-tier supplier structure: Tier One (supplying parts directly to Honda Canada); Tier Two (supplying parts to Tier One suppliers); Tier Three (supplying parts to Tier Two suppliers); and Tier Four (supplying basic raw materials, such as steel and glass, to higher- tier suppliers). The company's risk management system is focused on Tier One suppliers. As a result, it is only when a Tier One supplier is shut down by lack of supplies from a Tier Two, Tier Three, or Tier Four supplier that Honda would become aware of the existence of a problem.

ISSUES BEFORE GARDNER IN MARCH 2011

The rulebook, from the perspective of both Global Honda and Honda Canada, stated that in the time of an emergency someone in Gardner's position should form an ETF led by a senior executive and duly authorized to deal with issues on hand. The immediate mandate of the ETF, led by Gardner, was to gather as much current information as possible and to disseminate it across the organization in a consistent and understandable manner. At this point, the first roadblock appeared.

Although it had a manufacturing plant in Alliston, Honda Canada was largely a distributor, receiving finished products from Honda factories not only in North America but also from around the world and delivering them to Canadian dealers. The communication it received with regard to the supplier-factory dynamics in the first few days was thus second-hand information. It came from production facilities across geographies over which it had no direct supervision.

As word began to trickle from Alliston, however, the ETF began to realize that many issues were at play that Honda Canada Manufacturing had not been aware of. For example, the company's products had a high North American content, but many of the "components of components" were being produced and shipped from other parts of the world, including Japan.

In total, 113 Honda suppliers were located in the area of Japan most severely impacted by the natural disaster. Among them were 13 Tier One suppliers that were shipping parts and components to Honda

factories worldwide. Many of them had yet to make contact with Honda but it was evident that eight of the Tier One suppliers had suffered severe damage to their operations. It also became evident that five of the Tier One suppliers were supplying critical inputs (such as navigation systems and control modules) to Honda factories. Those five suppliers also sourced microchips from the same Tier Two supplier.

By the end of the first week, Honda Global had conveyed two strategic decisions to every subsidiary outside Japan production facilities should be kept running; and no associates would be laid off. Working with associates in production planning around the globe, the ETF's role was to understand how the factories would actualize this directive and how it would impact Honda Canada while coping with incomplete data. All factories had decided to regulate the flow of finished goods through what was known as production shaving. Honda of Canada Manufacturing, for example, would build vehicles at Alliston but at a much lower daily rate to deal with the imminent diminishing flow of critical parts and components. The pipeline would be drying up, and it was necessary to adjust the flow of output accordingly. Production would be prioritized on the basis of demand and on the need to equitably balance the impact for associates across all regions.

The immediate goal was to get all employees, dealers, and customers on board, and to ensure alignment.

Employees

The task before the ETF was to provide employees with an honest assessment of the situation without creating panic. Part of that task was also to empower the frontline field staff to better react, in turn, to the company's dealers and customers.

The core problem was that the information flowing in from various sources was limited, sporadic, and not always reliable. The Japanese members of the ETF, including the Canadian president, were working through the night virtually every day (as a result of the 13-hour time differential with Japan) to gather whatever new information they could from Honda Motor Company. They would then relay whatever they had learned to Gardner and the other ETF members as they started their business day.

Gardner had several areas of concern. The ETF needed to consider what to disclose from the privileged information that its members could access. It was important to ensure that employees would feel confident in the ability of Honda Canada leadership to manage the crisis. To keep staff morale high, the information needed to be filtered without compromising the need to be transparent. Disclosures needed to be timed in such a way that the ETF did not jump the gun with premature announcements or lose trust as a result of holding back information. Employees had their own channels of information both from within Honda through colleagues and outside it through the public media.

The ETF identified two other areas of concern confidentiality and consistency. While it was necessary to be open and honest with internal communication, there was also a need to be guarded in releasing information because competitors would be looking for gaps in Honda Canada's reliability and would move quickly to take advantage of its vulnerabilities. Additionally, each North American associate, each factory, and each sales organization needed to receive the same message so that everyone would be on the same page. The ETF would need to spend much time coordinating with the United States and Japan.

Dealers

Dealers were an even greater challenge in terms of open and transparent communication. They were one step removed from the national office and relied on the Honda field operations associates for the majority of their information.

Dealers would be judging Honda Canada's response to the crisis by standards that differed from those by which employees would be judging Honda Canada. "How does this impact my business" was a major driver for a dealer for whom the bottom line took high priority. The dealers faced crucial factors, such as the number of cars being allocated from a restricted pool, the time of delivery, and whether the whole process was characterized by fairness.

Jerry Chenkin, the executive vice president of Honda Canada, had already released one update to Honda dealers explaining the situation (see Exhibit 4).

Customers

For most Canadians, a vehicle purchase was driven more by needs (for example, a lease term nearing its end) than wants (upgrading to a fancier model). Honda Canada needed to sustain its commitment to customers on delivery times. The priority was to convey to customers that Honda was still in business. The onus would fall on the dealers and the company's customer relations team. It was imperative that both understood the situation and explained it to customers in a manner that they could relate to.

At a different level, cultural issues were also at play. For example, there was a language barrier. All communications from the head office in Japan, in the normal course, were in Japanese, and, as a matter of routine, they were being formally translated into English at Honda Canada. But the process was slowing down the response times in an abnormal situation. Approximately eight Japanese associates were working at Honda Canada and only a few Canadian employees spoke Japanese. They could be used for translations "on the fly," but doing so carried a risk of mistaken interpretations.

This risk was compounded by the fact that the information that Honda associates in Japan were able to glean from suppliers and other business contacts regarding the impact of the tsunami was not always complete or completely accurate. Supplier companies, for example, were guarded in their communications, providing less disclosure than what was needed to make accurate, informed decisions. They were also keen on showing that they did not need outside help. These traits contrasted with the North American practice of "telling it like it is" and of "give and take."

As Gardner and the ETF worked on further communications with employees, dealers, customers, and the public, they considered how to best strike a balance between the need for transparency and the uncertainty surrounding Honda's supply chain.