The Toyota Motor Company The global automotive industry is the largest manufacturing sector in the world, with the industry output equivalent to the world’s sixth largest economy. The automotive industry supply chain integrates four groups of stakeholders: original equipment manufacturers (OEMs), automotive component manufacturers (ACMs), sub-tier suppliers and infrastructure suppliers in the supply side of auto manufacturing Toyota is regarded as the benchmark for best practices in South Africa and throughout the world. This case study focuses on purchasing-related issues, such as systems, inventory, suppliers and quality in Toyota Toyota is oriented toward creating vehicles that will earn the satisfaction of customers. Toyota is open to any and all suppliers, regardless of nationality, size, or whether they have done business with them before. Their choice of suppliers is based purely on business considerations. They evaluate the overall strengths of prospective suppliers, including their quality, technological capabilities and reliability in delivering the required quantities on time. Toyota organises suppliers into functional tiers. First tier suppliers have been told to work as members of the production team for current products and as members of the product development team for future products. These suppliers are also encouraged to talk among one another about ways to improve the design and manufacturing processes. Subsequently, each first-tier supplier has formed the same working relationship among second-tier suppliers. Toyota does not want to build a large bureaucracy around its suppliers and, therefore, it has built instead a cooperative relationship, sharing risk and reward, and sharing people and technology There are obviously numerous tiers of suppliers, but their visibility really only exists into the first tier. This includes large companies like Johnson Controls and Magna International, which supply parts to the manufacturers. Second tier suppliers provide steel, whereas first tier suppliers provide parts. For automotive companies and their downstream partners, they have not yet created that Utopian collaborative environment for inventory management. Instead, it’s zero-sum. My gain is your loss and your loss is my gain. Toyota has actively propelled growth and innovation in its information systems by incorporating new information processing technologies while responding to various changes in the external environment, including rapid globalisation of development, manufacturing and sales operations, advancements in car electronics technologies; compliance with global environmental standards and changes in the Japanese and global economy. The economic crisis that shook the world from 2008-2009 also had a major impact on Toyota’s information divisions. Since then, Toyota has sought to improve the efficiency of system development and maintenance and has instituted structural reform of its system development and maintenance organisation. Sales and operations planning processes Sales and operations planning processes at Toyota are performed in two stages: annual planning and monthly ordering. Historical data such as sales will be considered in annual planning. The consolidated vehicle sales for the past five years are reflected in the following table: 2014 2015 2016 2017 2018 2019 The objective of the annual planning process is to establish a rolling three-year sales
and production forecast. The process is repeated semi-annually, so that the forecast is updated based on the latest market and economic conditions. The annual forecast is used throughout the company to project profits, establish capital and operating budgets, evaluate plant and supplier capacity requirements, conduct annual price reviews with suppliers and influence marketing strategies Using the annual plan volumes as a forecast, each production facility will consider the variables that impact on capacity. A key constraint is the great extent in which the operations rate varies by assembly plant. The following are some of the variables that impact on the operations rate and therefore, can be adjusted: • Direct labour and the flexibility to add workers – or reduce the workforce – and thereby adjust the production rate Because Toyota strives to avoid layoffs of employees, most Toyota plants employ some percentage of temporary workers to support the normal production level. If production needs to slow down because of slow demand, then temporary workers can be reduced. On the other hand, if production needs to be increased, then, most likely, temporary workers would be added initially. If the increase appears to be permanent, then some temporary workers would be converted to full-time employees. • Facility and equipment Each process has to be analysed to determine the weakest link in the production process. In other words, even if one could have added unlimited numbers of workers, there would be some equipment that would not be able to produce at a higher rate, e.g. a machine that is used to install a sunroof, may require the installation of an additional paint booth, etc. To understand the Toyota approach to sales and operations planning, an understanding of which entity in the supply chain submits the vehicle order is necessary. Simply put, it is not the dealers. At Toyota the regional offices submit the vehicle orders once every month. Toyota uses a monthly allocation process to allocate the vehicles planned for production to each dealer. In other words, it uses a top- down approach. Many other automobile companies create production plans from the bottom up: that is they collect the orders submitted by dealers and then create a production plan. Although there are pros and cons involved in both approaches, the top-down approach works well for Toyota, because it enables the company to ensure a stable resulting production plan. The Toyota Production System (TPS) was established based on two concepts. The first is called jidoka (which can be loosely translated from the original Japanese as “automation with a human touch”). This essentially means that, when a problem occurs, the equipment stops immediately, preventing defective products from being produced. The second is the concept of ‘just-in-time,” in which each process produces only what is needed by the next process in a continuous flow. Just-in-time offers
a smooth, continuous and optimised workflow, with carefully planned and measured work-cycle times
and on-demand movement of goods. It also reduces the cost of wasted time, materials and capacity. Team members can concentrate on their tasks without interruption, which leads to better quality, timely delivery and peace-of-mind for Toyota’s customers. Toyota’s postponement strategy is a great solution for reaching a balance between the selling price and customer satisfaction. Firstly, the company tailors the vehicle to what a customer wants, which includes even the minor details desired. Secondly, it is smart to keep the assembly operation plant in a central location instead of at a dealership, because more consistent work can be completed, which in turn, increases the efficiency of physical modifications. Thirdly, centralising the pool of components would require fewer inventories. With such a strategy, the amount of just-in-time inventory
that Toyota requires has been cut by about two-thirds during the last four years. The Toyota Production System (TPS) demands similar processes for logistics wherever they may take place in the world. The emphasis on heijunka – the smoothing of the production flow- and just-in-time assembly require strictly scheduled deliveries. At the same time, the low inventory pull system for replenishment demands high frequency and small lot deliveries. The result is often a large, flexible trucking network. Controlling the design of the carmaker’s trucking routes and frequency, which the plants have previously managed and outsourced to providers, means that Toyota can respond more quickly to supplier and market changes, says Steve Brown, vice-president of Logistics Control. “There are only about ten times a year that you have the chance to adjust your transport flows, Brown says. We have our own system and management for that, so we can do things much more quickly.” Drivers of the Toyota Supply Chain Toyota’s expertise in developing new products is well recognised. Its lead-time for a derivative model designed on an existing platform has been as low as ten months. The Toyota Product Development ith its vaunted production system, has become a big advantage to Toyota. Within Toyota, experience with the production system remains bedrock training for almost everyone having other responsibilities. Every new Toyota engineer does a stint in production – at a dealership, probably selling vehicles. To design them to be made and sold, you need first-hand experience with the processes for which you are designing. A key trend in the automotive industry is the increase of the variant numbers on individual models and standardisation of components in the supply chain. This means that models can be adjusted to the individual tastes of customers and new models are developed and produced continuously, so as to meet the changing market demand. The uncertainty in the market place is translated into mix flexibility and volume flexibility in order to be competitive in the market place. Generally the parts that the customer does not touch and see are the ones that are standardised; others are left to differentiate different models and fine-tuned to their taste. Recall of faulty vehicles When Toyota recalled vehicles world-wide and in South Africa in 2010, despite their good reputation and the best practices employed, it became clear that perfection or zero defects’ is just a goal to strive for and not yet reality. The recall of Toyota vehicles was not good news for Toyota, because it could hurt their reputation for quality and reliability. Xiaoyuan (a researcher in the United States) is of the opinion that the recalls are the result of Toyota’s business strategy, which sacrifices its customer-first focus in favour of driving shareholder value and Toyota gradually shifting away from the tenet of lean manufacturing. Seeking cost leadership and market leadership has gone too far and differentiation through quality, reliability and fuel efficie become blurred. The researcher adds that the execution of such a business strategy has lured Toyota to rush into relationships with suppliers during the past few years and it has not adequately vetted and to apply questionable security measures as it sourced parts from around the world. In doing so. Toyota has been constantly adding stress to the security of its supply chain. In the end, its risk mitigation capability does not improve and quality standards have lapsed. Toyota sources parts from suppliers worldwide, based on the cost competitiveness of suppliers – not on the long-term view of good relationships in which there is security for the suppliers and focus on quality. This is almost a contradiction of Toyota’s philosophy about suppliers being referred to as business partners. Toyota prefers long-term relationships with suppliers in order to realise mutual growth based on mutual trust. However, Toyota admits that cost is the most important key performance indicator. The question could be asked: Has quality being sacrificed by focusing on lowest cost? The majority of the foregoing problems have almost certainly not originated in Toyota’s own factories, but in those of its suppliers. The automotive industry operates as a complex web. The car-makers (known as original equipment manufacturer or OEMs) sit at its centre. Next are the tier-one suppliers, such as Bosch, Delphi, Denso, Continental, Valeo and Tenneco, who deliver big integrated systems directly to the OEMs. Fanning out from these are the tier-two suppliers, who provide individual parts or assembled components either directly to the OEM or to a tier-one supplier. CTS Corp, the maker of the throttle- pedal assemblies that Toyota has identified as one of the causes of unintended acceleration in some of its vehicles, is a tier-two supplier whose automotive business accounts for about a third of its sales. There is a widespread belief within the car industry that Toyota is the author of most of its own misfortunes and that its mistakes hold lessons for others. In testimony delivered to the House oversight committee on Wednesday February 24th, Mr Toyoda, the car-maker’s boss, acknowledged that, in its pursuit of growth, Toyota has stretched its lean philosophy close to breaking point and, in so doing, has become “confused” about some of the principles that have made it great originally – i.e. its focus on putting the customer’s satisfaction above all else and its ability to stop think and make improvements”. At his point, Toyota Motor Company wants dealers to educate buyers on model features to ensure that they are not mistaken for safety flaws, after a “large number of owners ignored warnings not to stack floor mats beneath accelerator pedals. Before this mishap, Toyota had a reputation for pristine quality, centred on its super-lean production methods that empowered workers to hone in on quality control. Toyota executives have acknowledged the escalating recalls were partly caused by the company’s overly ambitious growth goals. It is said that Toyota, the Japanese car-maker widely regarded as the grandfather of operational excellence, “turned operational excellence into a strategic weapon.” The vehicle quality issues notwithstanding, Toyota continues to leverage a corporate philosophy of excellence in operations management and operations planning to make cars better, faster and less expensive.