How Ford and Toyota Took Different Approaches to a Logistics Partnership

April 12, 2009 - Tags:

An excellent example of the contrast in approaches between Toyota and its competitors is in how Toyota approached the logistic challenges in building manufacturing and supply chain capabilities in North America. How can Toyota assembly plants get just-in-time delivery of parts multiple times per day to U.S.-based plants when they are spread across the U.S. and Canada? One part of the solution was to use cross-docking (some call these “break-bulk” facilities). In this case, the cross-dock takes in deliveries of supplier parts a few times a day and reconfigures them into different mixes of products so they are shipped as mixed truckloads of the right number of parts for one to two hours of production. The cross-dock allows for efficient pickup of parts from suppliers and for just-in-time delivery to the assembly plant. Cross-docks are quite common in many industries, for example, in the food industry, and normally cross-docking is subcontracted out as a commodity. What is distinct about Toyota’s cross-dock is the care with which Toyota’s partner, Transfreight, manages it and the care with which Toyota painstakingly teaches that partner to use TPS. From Toyota’s perspective, the cross-dock is an extension of the assembly line—part of the lifeblood of the value stream that gets parts just in time from suppliers onto vehicles and finally to customers. It is all part of the flow.

Ford Motor Company, in the mid-1990s, developed the Ford Production System, which was modeled after the Toyota Production System. Most of the early focus was on implementation inside the four walls of the plant, but later in the 1990s they began to focus on “synchronous material flow” outside the plant—mainly getting parts to the plant just in time in small lots with frequent deliveries. So Ford did what many large U.S. companies do in this situation. In the late 1990s, they hired an outside executive and gave him the task. The executive they hired had worked in logistics for General Motors and had some exposure to NUMMI (though he had not worked there). He fit the Ford model of an aggressive, hard-driving leader who issues orders and expects action or heads to roll. He recognized that he had to change the way the assembly plants were set up to accept just-in-time deliveries and deliver parts in small quantities, so he hired a large group of experts on pull systems in the factory (over 20 of them) to straighten out Ford’s internal logistics. They worked in the assembly plant, pulling inventory off the assembly line and in some cases repacking parts from large 4’ x 4’ x 4’ containers into small containers holding one hour’s worth of parts. They then put in pull systems to replenish the assembly line. This still left the assembly plants with large inventories of parts from suppliers in the wrong-sized containers, but that was supposed to be taken care of by a separate external logistics initiative, so they didn’t worry about it.

This Ford executive decided to handle the external part of the logistics process by hiring it out to a third-party logistics firm, sort of like Toyota’s supplier, Transfreight. He put out a request for bid that had aggressive cost-reduction targets for cutting logistics costs (10% per year) and offered the whole of North America to the company that would meet the target price. Penske Logistics won the bid and set out to get to smaller lot deliveries of parts to the assembly plant. They took on responsibility for getting 167,000 production parts from 900 suppliers to Ford’s engine and assembly plants. They designed and managed the entire transportation network, dealt directly with the carriers, handled disciplinary issues, and paid bills.

The Ford executive issued the marching orders: “every part every day.” He meant he wanted every part currently delivered weekly or monthly to the assembly plants to be delivered at least once every day. This was a “take no prisoners” order. Ironically, he called the project “Nirvana” and the centerpiece was the deal negotiated with Penske Logistics. Ford stood to save hundreds of millions of dollars in transportation and inventory costs. As a result, the Ford executive was promoted to vice president of Ford’s material planning and logistics.

Penske Logistics set up a business unit with its own executive dedicated to the Ford business. Penske did not own many of the assets associated with Ford’s business, such as trucks or cross-docks, but instead was acting as a broker, making the appropriate arrangements from Ford’s end and the logistics end. Penske had full-time analysts and traffic people who were setting up the appropriate transportation logistics and then managing it on an ongoing basis. This put Penske in an intermediary position in which it needed to both negotiate with Ford assembly plants on things like delivery times and part quantities and negotiate with transportation service providers. In the assembly plants, the plant managers had inventory reduction targets and arranged to set up much smaller, Toyota-style “parts supermarkets” and free up warehouse space for other business.

Overall, the effort seemed to have all the trappings of duplicating Toyota’s system … on the surface. But the results were nothing short of a disaster. In an interview with a Penske manager responsible for design of the transportation network in fall 2002, we learned:

“Every part every day” was great for the plants, because it hollowed out the buildings and they were making money with that space. But it cost logistics $100 million more per year. After a while, it got so distasteful to Ford that the VP in charge left and we were tasked with going back to the old system of delivering large batches of parts weekly and monthly. We have been working on that for eight months. Ford senior management is baffled at why we cannot do it in eight weeks. But it will take more like one year. The goal is to get back to pre-Nirvana freight costs. By the end of Nirvana, we had the capability of shipping 95% of parts every day. With the new vision, Ford management would like to see it around 60% and currently we have it at around 80%. It was unrealistic to go from non-JIT to JIT and expect cost savings. I do not know where the savings were supposed to come from. We just completed a study of delivery network improvement. We think it will save Ford $8 million per year. But what will it do to the plants? It is going to put in more inventory and they are not happy about that.

There is a lot embedded in this case example that illustrates how Ford, under then CEO Jacques Nasser, had a supplier management approach totally in contrast with that of Toyota. Ford was well-intentioned in trying to learn from TPS in moving to just-in-time in its parts supply network. What did Ford do wrong from the perspective of the Toyota Way?

  • Ford tasked an executive hired from the outside to manage a multi-billion-dollar logistics network, and he was able to make major decisions based on his own vision.
  • This executive did not understand the “Ford Way” and had only a superficial understanding of how to get to a just-in-time logistics network. For example, Toyota would never try to move “every part every day.” That makes sense for some parts but not others.
  • He handed off an amazing amount of responsibility to an outside vendor with which Ford did not have a strong partnership—at least not in this area and on a project of this magnitude.
  • The outside vendor was purely a logistics management company and in fact did not have any real expertise in the Ford Production System. They knew how to move freight, and that is the only “network” they wanted to optimize—freight costs.
  • The outside vendor never understood or believed in the mission of Nirvana and thought Ford was making a mistake that could only lead to higher costs.
  • Ford put an outside company between its plants and the logistics network, guaranteeing political battles between different functions that want to suboptimize for their own benefit.

The last point is an important one. Toyota works hard to break down barriers among functions so everyone is working toward a common goal. By hiring an outside logistics vendor that has the sole objective of reducing cost in the transportation network, Ford was almost guaranteeing conflict and suboptimization. As the Penske manager explained:

We (Penske) are playing in the middle between the plants and the parts delivery network. The plants want what is best for them. Optimizing delivery costs may not be the cheapest for a given plant. A plant may want parts from a specific supplier delivered to it five times a week. If I go there once a week with a truckload of volume, I save money for the delivery network but inconvenience that plant. Plants always want JIT delivery. But the delivery network may be going to less frequent, less expensive deliveries. I talk to the plants in numbers and they talk to me in numbers. If my numbers are bigger than theirs. I win and the network wins.

The results were that Ford never really got to just-in-time and an enormous amount of money was wasted. The logistics network Penske was rebuilding after Nirvana still represented a compromise. For example, when plants emptied out their warehouse space, they put in more production and reduced the amount of space available for holding inventory for less frequent deliveries. As a result, Penske had to rent warehouse space near the plants.

In contrast, Toyota did not simply hand off responsibility to Transfreight for cross-docking, but rather slowly and deliberately built Transfreight into part of the extended enterprise over a 10-year period. Transfreight was a joint venture formed in 1987 between TNT Logistics and Mitsui Trading Company—part of the Toyota family of companies in Japan. TNT Logistics had an existing logistics network and Toyotas goal was to keep as much as possible of North American auto supply in North America. Mitsui’s role was to be a silent partner but to give Toyota control over the joint venture. (Actually, it was 50-50 ownership.) With intense involvement by TPS experts from Toyota, the first cross-dock was set up. A Toyota advisor from Japan even toured the first cross-dock with the Transfreight plant manager and drew on the floor what the system should look like.

The purpose of the cross-dock is to take in deliveries from distant suppliers a few times a day, temporarily store the pallets of material, and then load trucks for the assembly plant with mixed loads going out about 12 times per day. The assembly plants get frequent JIT deliveries and trucks are full from suppliers to the cross-dock and from the cross-dock to the assembly plant.

The cross-dock is designed using all of the principles of the Toyota Production System (Karlin, 2003). It is a flow-through facility, associates are involved in continuous improvement, visual indicators and mistake-proofing devices are everywhere building in quality and reliability, and truck drivers have clearly defined roles in picking up and delivering within tight time windows, including making quality checks. Nothing is left to chance. The system is set up using many of the principles of the service parts operations distribution system we discussed in Create Continuous Process Flow to Bring Problems to the Surface on flow.

Because of the tight coordination among parts suppliers, Transfreight, and the assembly plants, there is a carefully orchestrated flow of parts moving toward the assembly plants and the returnable containers coming back from the assembly plants through the cross-docks. It is basically a one-for-one exchange of full containers for empty returnable containers. Toyota works hard in the assembly plant to level the schedule, which also levels the delivery of parts through the network to the assembly plant. This leads to a very even flow of parts from suppliers through the cross-dock to the assembly plant and creates a balance between parts sent to the assembly plant and the returnable containers sent back to suppliers.

  • Toyota started small with one cross-dock and one assembly plant and over a decade built up Transfreight so it serves most of their North American cross-docking needs. Transfreight has added additional customers beyond Toyota and is a profitable enterprise. The results:
  • Toyota achieved its goal of just-in-time deliveries in North America despite the great distances.
  • The costs of transportation went down considerably after the cross-docking system was in place. Before the cross-docking, there were expensive milk runs from supplier to supplier over great distances, with the trucks only partially full. Now trucks are almost always very full in either direction.
  • Toyota saves money on returnable containers, using the minimum number because of the balance between parts going to the assembly plant and empty containers returned every day.
  • Transfreight is continually improving and reducing costs, like other Toyota operations.

Not only has Transfreight successfully solved Toyota’s problem of JIT logistics in North America, but it has become a successful international company and an exemplar of lean logistics. On two occasions, Transfreight has won Toyota’s Truckload Carrier of the Year Award. Toyota has continued to give Transfreight additional business as it has expanded globally to plants in West Virginia, Indiana, California, France, the United Kingdom, and Spain.

It is interesting to note that TNT Logistics did not understand the value of Transfreight and was unable to transfer the remarkable lean logistics system to its own operations. Mitsui, on the other hand, saw Transfreight’s stellar reputation in the trucking and logistics industry and its profitable growth. TNT and Mitsui discussed their positions and came to a mutually agreeable settlement in which Mitsui bought out TNT’s half of Transfreight. Effective June 27, 2002, Mitsui became the sole shareholder in Transfreight.