How to Apply Toyota Way Principles to Nonautomotive Supply Chains

January 19, 2010 - Tags:

The underlying principles associated with managing variety, velocity, and variability across the supply chain—the focus of Toyota’s supply chain leadership and management process—are found in many different industrial contexts. We provide several examples from service industries such as health care, insurance, banking, credit processing, and retailing. Products and services covered include apparel, wine, brake linings, emerging market product development, concrete delivery, and more. In each of these cases, a supply chain leadership strategy delivered superior performance. If you are fired up and eager to develop your individual industry application using the Toyota supply chain principles, this chapter offers several different application prototypes.

Banking Example

Goland, Hall, and Clifford1 provide a description of how the application of Toyota principles to banking can yield significant results. They describe the back-office check processing operations for a bank that faced capacity shortfalls and demands for added capacity to process checks. A couple of managers decided to follow the “Journey of Chuck the Check” by mapping the steps involved in processing checks at the bank. What they discovered was astounding. More than 45 percent of the time, the check processing machines sat idle. Though checks could be sent for processing two times a day, most banks accumulated checks and sent them in at the end of the day. Even when processing, the machines were subject to breakdowns, and checks had to be processed more than once.

Clearly, the process was not streamlined, and the capacity issues observed reflected deeper underlying problems. The managers then went back to the banks and worked to streamline the procedure of separating checks in batches before they were sent for processing. Checks that needed additional time at the bank before they were sent were kept until the evening, while others were shipped out earlier in the day. This smoothing of flows permitted the arrival of checks to the sorting facility to be better synchronized with capacity demands. Next, the bottleneck: check sorting equipment and its operation were examined and provided with additional resources to ensure its availability during peak demand periods.

The impact was faster check processing and lower capacity utilization, thus providing additional capacity to provide check processing capacity for other banks. What was a source of problems due to capacity-related congestion was not only improved with regard to service, but it was also converted to a revenue opportunity. Continuous improvement in this context would include examining the process to identify sources of waste and scope for increasing value to customers. Such process changes can lead to learning more about customer needs and supplier technologies leading to further cycles of PDCA.

Hospital Example

Mango and Shapiro2 provide an application of Toyota supply chain principles to a cardiothoracic facility. Demand at the facility directly related to arrivals of patients for service. Capacity referred to the number of operating rooms or beds available for a step in the process. Time to complete a step varied based on patientand doctor-related variables. The facility had frequently become a bottleneck, with patients kept waiting for surgery.

The typical process for a patient at the cardiothoracic facility involved: going to the operating room, then sometimes to the surgical anesthesia intensive care unit or the cardiothoracic intensive care unit, followed by a step-down unit, then to a general unit, and discharge. The system discharged about five patients per day, and demand exceeded capacity about 30 percent of the time.

A closer examination of the system showed that the time for surgery varied between 283 and 368 minutes, but when separated by surgeon, the time became quite predictable. Thus, rather than build in variability as buffer time, the system scheduled the right amount of time based on a surgeon’s characteristics. Such a planning approach increased utilization and kept appointments on track. The next variability observed was large demand surgeries on Fridays. A closer examination showed that many people who developed chest pains over the weekend went to see their primary care physician on Mondays or Tuesdays and arrived at labs for testing a couple of days later. Thus, Fridays became a bottleneck for operating rooms. The hospital decided to examine patients and prioritize surgeries based on the type of blockage. That step spread out the demand for operating rooms over the whole week. Finally, when a surgery was completed, the hospital created SWAT teams to clean and sterilize the operating room to return it to use.

The net effect was a streamlined facility with smoothed flow, reduced variability for surgery times, and quick turnaround of bottleneck operating room resources. Indeed, all of the elements of a Toyota supply chain thought process are illustrated in this example.

Continuous improvement might address further reduction in waste of patient and surgeon times, scheduling follow-ups and obtaining feedback, and the like. That step would in time create opportunities to kaizen supplier operations, service provider operations, and technology introduction.

IBM Credit

Hammer and Champy3 provide a classic example of how changing the process can improve performance. The example concerns the credit division of IBM. This department was used by IBM salespeople to offer credit terms to businesses that agreed to purchase IBM software or hardware.

The original system consisted of a series of steps. First, orders were taken over the phone by customer service representatives. Those orders were passed along to a business department that focused on loan covenants based on business contexts. That step was followed by a credit check. The next department determined pricing. Finally, an administrator generated a letter providing all details and pulled together all related paperwork. That material was then express-shipped to the salesperson. The average lead time for the entire process, from start to completion, was eight days, but the observed time took as long as two weeks.

A couple of senior managers at IBM Credit decided to personally walk a credit request across all departments and discovered that the actual processing time was 90 minutes, while the lead time (as mentioned earlier) was as long as two weeks. The source of all of the delays was the batch and queue mode of operation, as each transaction waited at a step until its cohort batch of orders was processed, and then waited in line to start the next step.

A closer examination of the process showed that about 20 percent of the task types accounted for 80 percent of the volume. A careful standardization of the process for the 20 percent converted the steps into a menu-driven system that could be completely managed by one person. These generalists thus took a credit request from start to finish for 20 percent of the standard credit requests. Of course, standard rates for such requests may have potentially increased the risk of bad debts. The remaining 80 percent of requests that accounted for 20 percent of the volume were still handled by specialists. The net result of such a triage mode of operation was to increase the volume of credit requests handled by a factor of 100 (100 old volume) while decreasing head count slightly. Clearly, redefining processes, changing work allocation, and standardizing tasks significantly increased delivered performance.

Kaizen would probably start with continuous appraisal of client needs, creation of a database to understand failures and long delays, further training in procedures, and the creation of teams to identify and solve problems.

Ford Accounts Payable

Another example from the book by Hammer and Champy describes changes in the accounts payable process at Ford Motor Co. Ford’s accounts payable department had 500 employees handling transactions. Their task involved reconciling three documents: the purchase order, the receiving document, and the invoice.

In an attempt to streamline this department, Ford examined the accounts payable operation of a partner company, Mazda. Mazda operated its accounts payable department with five people. This stark contrast, despite company size differences, suggested a need to redefine the process to reduce overhead.

The first step was to change the way product was received. All open purchase orders were included in a computer system. All receipts were against these open purchase orders only. Thus, reconciliation of the receiving document and the purchase order was completed on receipt. Given this reconciliation, payment was scheduled as per the predetermined terms. This one change in the process reduced tasks for the accounts payable department significantly. In one section (engine components) the size of the staff decreased by over 80 percent.

The next change was to replace purchase orders with supplier-certified blanket purchase orders and vendor-managed inventory arrangements. Under this scheme, as parts are used in assembly, they are replenished and vendor payments are scheduled. The net effect is to eliminate reconciliation of the purchase order and receiving document with the invoice. Because this reconciliation is done upon usage of components, the role of accounts payable changed to enable supplier monitoring and certification.

All of these changes synchronized steps across the supply chain and thus reduced the need for the overhead at accounts payable. That synchronicity decreased capacity, increased efficiency, and thus improved overall performance.

Could the system be improved even further? Could suppliers be coaxed to take payments when cars are sold with their components? Under such an agreement, how would supplier designs change and what information would need to be shared with suppliers? How would marketing campaigns have to be managed to take into account supplier and OEM interests? Notice that all of these issues deal with continuous improvement in a synchronized supply chain.

The 7-Eleven Japan Story

With sales of over $21 billion in Japan and inventory turns of over 55 along with greater than 30 percent gross margins, management of 7-Eleven Japan’s supply chain,4 covering over 9,000 stores, provides a great case study of execution throughout the day. The 7-Eleven Japan stores are located in residential areas, within walking distance from homes. Given the average small size of the stores, to have appropriate stockkeeping units (SKUs) in stock over the course of the day requires repeated store variety changes.

The process starts with information systems that detect customer choice at each individual store. Analysis of individual stores and aggregation across stores permits shuffling inventory across stores to manage store-level variety and thus increase SKU velocity. Store shelves are reconfigured more than three times a day to reflect demand preferences by time of day. While morning items might focus on breakfast-ready SKUs, the same store caters to dinners by the evening. Trucks are scheduled to make deliveries in 30-minute windows, and products are unloaded and put away at stores without being checked against scheduled deliveries. Delivery flexibility is ensured by adjusting transportation mode (the company uses motorcycles, boats, trucks, and helicopters). In one example of this flexibility, the company was reported to have used 7 helicopters and 125 motorcycles to deliver 64,000 rice balls to the city of Kobe after a devastating earthquake hit the area.

Managing inventory across stores enables the inventory impact of variability to be kept in check. Reshuffling SKUs through the course of the day enables variety to be synchronized with demand and demand velocity to be maximized. In short, 7-Eleven Japan provides a retailing example of Toyota’s supply chain management.

It does not require great effort to imagine the scope for kaizen. For example, a metric that measures truck utilization, mileage, and on-time delivery on a delivery-by-delivery basis will uncover enough to start the PDCA cycle.

Rane Brake Linings

Rane Brake Linings (RBL)5 has enacted changes that enable it to compete globally as a manufacturer of brake linings. The company is a division of the Rane Group and won the Deming prize in 2003. It is a major supplier of brake linings to the Indian railways as well as to automotive companies. One of the capabilities that RBL has developed that permits it to be a global competitor is the ability to diagnose problems across the supply chain and solve system-level issues rapidly. One example of this capability involves the brake system provided to a two-wheeler company that experienced stickiness in the brakes. RBL was the brake provider that assembled the brake linings to stamped parts provided by a supplier. The resulting brake was assembled by the OEM into its product. Upon hearing of the issue faced by the OEM’s customers, RBL installed its own engineers at every step in the supply chain. They then developed four different designs over a 10-day period that carefully identified adjustments to the supplier stampings, adjusted the brake lining manufacture and assembly, and then worked with the OEM to see that the parts were assembled appropriately at the OEM’s assembly operation. The net result was an improved brake system while manufacturing productivity was maintained. The ability to coordinate upstream and downstream, develop multiple designs rapidly, and deploy the resulting designs suggests that there is a unique capability to synchronize across the supply chain. That ability to meld engineering design talent and manufacturing may well be a competitive capability that enables RBL to compete globally.

Another capability that RBL has is its approach to maintaining product costs through careful global sourcing. For example, one company was importing chemical inputs from Canada that were priced in dollars. There also was an opportunity to compensate for the rising dollar (at that time) by including sources from Russia. The adjustment in product designs and approval would generate a cost reduction. But at the same time there was another effort to improve productivity through a change in design of the existing product. The phasing in of the new design and then the change in sourcing resulted in both product design improvement as well as a cost reduction.

While Total Quality Management (TQM) approaches have not been shown to be profitable in many companies in mature markets, their success in emerging and growing markets is a new story. RBL’s success after TQM implementation and the associated productivity gains has enabled it to remain a strong competitor in the Indian market and engage effectively in global markets.

Progressive Insurance

The typical insurance company operates its offices just during regular hours (ordinarily, 9 a.m. to 5 p.m.). Thus, when a client has an insurance claim, the client’s call is usually recorded and followed by an attempt to contact the client. Following contact with the insurance company, the client is responsible, for example, for taking the damaged automobile to a repair facility, renting a car while repair is being completed, submitting receipts, and paying the deductible and thus completing the processing of the claim. The associated delays present a challenge to clients since they are responsible for doing many of the steps necessary to get back to a normal state.

Progressive’s CEO Peter Lakrides had a different idea: “Process claims whenever the client has a need and fulfill the need on site whenever possible.”6 Implementing this idea meant that customer service agents were distributed spatially in Ford Explorers around towns so that they could get to the site of an accident quickly. The company invested in an information system that permitted all data to be accessed wirelessly by the agent on site. Clients were offered the option for a check cut on the spot of the accident to settle claims. If a client preferred, Progressive took charge of the car, completed all repairs, and delivered the car to the customer. The customer was given a ride home with arrangements for a rental car to be provided. In short, Progressive became available when the customer wanted assistance.

The net impact was a significant market share increase for Progressive as it targeted drivers who valued such superlative service. Because accidents were observed on site, both fraud claims and repair costs decreased. In short, improved service decreased overall costs, thus permitting increased profits. A supply chain view that takes the customer’s perspective has played a crucial role in Progressive’s success. Progressive can continue to improve with analysis of clients’ needs. Continuous improvement on these dimensions will require the most creative problem-solving teams imaginable.

Shouldice Hospital

Shouldice Hospital in Canada is often hailed as a great example of a service factory. The genesis of this hospital was the observation by Dr. Shouldice during the period of World War II that hernia surgery, which was a nonemergency procedure, was taking up three weeks of hospitalization during a time when hospital capacity was scarce. However, in a single operating room, Dr. Shouldice completed surgery for about two hernias per day. The facility expanded to several more buildings, and all surgery now takes place in an 89-bed facility in Thornhill.

Shouldice Hospital has been dedicated to the repair of hernias for over 55 years. The hospital focuses on the standard hernia surgery, staying away from complicated cases that frequently involve older patients. The facility focuses on maximizing the success rate by performing standardized steps, thus increasing the learning curve benefits and associated success. The founder likens Shouldice to McDonald’s, with its emphasis on standardized processes to produce its specialties (e.g., fries at McDonald’s).

The hospital has spartan rooms with no entertainment. Surgeons meet the patient on arrival and focus on surgery success. The large number of common spaces and self-serve focus for patients encourages the view of the facility as a nonhospital environment. The hospital focuses on management of processes used in the operating system, care path and procedures as well as a dedicated organizational and physical design. As a result of its high volume, the system can operate at low cost while delivering high quality. For example, hernia surgeries at Shouldice average US$954, versus US$2,000 to US$4,000 elsewhere.

Analysis of Shouldice Hospital’s success suggests that the menu of services at the hospital limits what the facility does, but the volume of such activity enables increased success as well as speed. In addition, careful attention to detail and an emphasis on processes and efficiency put the focus on simplifying procedures and kaizen. That results in a constant emphasis on improving the process by using data. The overall impact is high performance on the dimensions of cost and quality.

Although Shouldice is a well-studied example of a facility that performs a specialized medical service (i.e., hernia operations), such focused operations are found in other specialties. The Texas Heart Institute does bypass surgeries for $27,000 (which is $16,000 cheaper than the national average); it has a five-year survival rate of over 92 percent, which is better than the rate at most other facilities. Likewise, Salick Health Care, Mid-America Dental, Hearing and Vision Care in Missouri, and the Mayo Clinic (which has a broader focus than the others mentioned but is very process oriented) all provide examples of supply chain–like operations, like those used at Toyota, in the health-care industry.

Shouldice has kaizen built into its systems. Interestingly, the impetus for change in procedures, processes, and equipment might also come from Shouldice’s “mass production” system rather than 100 percent top-down from the equipment designers or pharmaceutical firms.

ALDI

ALDI, a German-based retailer, is a “limited assortment discount international retailer.”7 The company was founded after 1945 and has global sales of over €33 billion ($43 billion). It has more than 5,000 stores across Europe and Australia and 600 stores in the United States. Unlike supermarkets that have between 15,000 and 40,000 SKUs, ALDI stocks 700 items. These items are the mostneeded, most-often-used products in the home. The store offers no bagging service, no check cashing, and no special displays. Prices are 20 percent lower than at Wal-Mart. The company generates sales of €30 million ($39 million) per SKU versus Wal-Mart’s sales of 1.5 million per SKU. This figure is impressive, given that Wal-Mart is six times larger than ALDI.

The company keeps a sharp focus on price, and whenever a supplier lowers its price, ALDI’s retail price is lowered so as to maintain the lowest price in the market. Executives in the company admit that adding 50 new items could increase sales revenue by €1 billion ($1.3 billion), but the company limits its assortment to 700 items. If any new items are added, existing ones are dropped to compensate. In many cases, the company produces its own brand, thus increasing buying power.

In Europe, the retailer has 51 percent of the fruit juice market, 42 percent of the canned vegetable market, and 50 percent of the packaged and preserved meats market. ALDI’s sharp focus on a small selection of SKUs (700) that constitute around 80 percent of shoppers’ baskets, private label manufacturing that enables supply chain efficiency, significant volumes that enable scale economies, lower price points, and low service levels all create a unique and competitive retail environment.

Continuous improvement in this context would involve tracking changing customer tastes, more cost reduction, reduction of waste (e.g., in perishable goods), and so on. The main metrics could be price compared to other stores while the most desired goods would be kept on the shelves.

Fujitsu Computer Services

Womack and Jones8 describe the example of Fujitsu Computer Services and the management of its supply chain role for British Midland Airlines (BMI). When Fujitsu Services started its contract with BMI, it was paid based on the number of calls handled, and the focus was on the speed of processing calls.

But Fujitsu decided to analyze the calls and identify the reasons they were made. It discovered, for example, that printer malfunctions accounted for a large percentage (more than 26 percent) of calls. The problems arose with such things as printing baggage tags and boarding cards. Those issues translated into passenger delays, the need for backup printers, the necessity for quickly dispatching customer service agents to fix the printers, and so on. The average time to fix these errant printers was about 10 hours.

An analysis of the root cause of the problem, as well as the true impact on flight-related costs, suggested that BMI would have been better off spending more money on better printers. The new printers the company eventually bought decreased calls by over 80 percent and cut down the time to fix printer problems to less than three hours. A supply chain view enabled costs to be decreased systemwide.

As a result, Fujitsu offered a new contract to BMI. The computer services company would be paid based on the projected volume of calls but was free to focus on system improvements that lowered overall costs. The result has been a system in which Fujitsu monitors problems and anticipates issues before they arise. In addition, by identifying customer issues, Fujitsu is able to develop new custom products that can solve the customers’ problems and kaizen its supply chain operations.

Tesco

Tesco is a British retailer that has significantly improved its in-stock availability while decreasing inventories. While observed fill rates in grocery stores is 92 percent, Tesco’s systems ensure a fill rate of over 96 percent. Womack and Jones9 suggest specific steps taken by Tesco to improve its in-stock position.

The retailer coordinates with large-volume suppliers for direct pickup from its warehouses, cross-dock through its own warehouses, and delivery to stores. The quantities provided to stores follow a replenishment mode of operation also known as a “pull system.” Replenishing sold products guarantees that the mix of product shipped synchronizes with demand mix. Such a dynamic adjustment of inbound shipments to synchronize with demand enables assortment matching and thus ensures a uniform service level across SKUs. Shipping in quantities that match demand also allows inventory levels to be lowered. But what is needed is an effective logistics system that can maintain efficiency by aggregating volumes across stores to effectively use transport capacity.

The same approach has enabled Tesco to use a common back-end supply system to support multiple front-end retail formats. Tesco has local convenience stores (Tesco Express), midsized stores (Tesco Metro), large stores (Tesco Superstore), hypermarkets (Tesco Extra), and Web-based stores (Tesco.com). Each of these retail formats is optimized to satisfy its customer base. But because they all share common back-end operations, it is possible to offer buying-efficiency-related pricing across these formats. In addition, collecting data from customers with loyalty cards that can be used across formats enables a unique window into the total shopping basket of customers.

Tesco’s multiformat supply chains suggest that it has a system similar to Toyota’s common supply chain processes used to deliver different car experiences to the customer and adjusted for different selling geographies across the world. The opportunities for kaizen are likewise numerous due to the common backend system.

Zara

Zara represents a new generation of supply chains in the apparel industry. The following anecdote regarding Zara says it all: “When Madonna went on tour in Spain in early 2001, she started in Madrid and ended in Barcelona 10 days later. The fashion that teenagers picked up from Madonna’s outfits were developed, manufactured and available in stores in Barcelona by the time the tour ended. This was a remarkable accomplishment, 10 days from design, development, and manufacturing to store availability.” Zara is a multi-billion-dollar company with stores all over the world. The Spanish company owns large sections of the apparel supply chain and manages the entire chain to speed innovation and product availability. One secret is the constant flow of customer requests and information from stores to the design studios. Zara relies on a constant flow of product from plants to stores and does not replenish product.

The apparel firm sources the fabric from all over the world (e.g., Italy, China, Japan, and India). It owns its own cutting machines that cut the fabric in batches within each roll to minimize scrap. Independent sewing shops in Europe do all of the stitching. The apparel comes back to Zara where it is ironed, packaged, and grouped by store. The company contracts with independent trucking companies to distribute the products to stores that are solely owned by Zara.

Customers expect fresh assortments every time they visit the store, and they do not expect products to be in stock for a long time. By controlling most steps in the supply chain, Zara is able to respond quickly to market trends. The degree of vertical control at Zara also decreases the cost of errors in the forecast. But Zara may also have identified that having a fast supply chain enables it to charge a price premium for the market segment it targets. Reports indicate that it also leaves sufficient value for customers so that they return to the Zara stores far more often than they do to competitors. In addition, Zara’s store managers keep track of customer requests for changes to existing designs and pass along that information to buyers at Zara headquarters. That feedback from customers is incorporated, when appropriate, into new design changes that flow back to the store.

In fact, Zara used the services of Toyota to design several of its operations. Zara’s kaizen during the season, fast cycle manufacturing, and control of the supply chain have resulted in the synchronization of the supply of SKUs with demand. That enables lower inventories and higher service levels and provides greater value for customers.

Reflection Points

The examples in this chapter show ideas related to the v4L framework applied to different industries.

  • Variety is carefully chosen at Shouldice and ALDI in order to be able to offer a distinct operational advantage and cost competitiveness.
  • Velocity of the flow of product at Progressive Insurance, IBM Credit, and Ford Accounts Payable comes from a careful process design that ensures rapid execution.
  • Variability is managed at Rane Brake Linings, Tesco, Fujitsu, and the hospital and bank by smoothing flows, eliminating bottlenecks, and identifying reasons for and adjusting plans to observed variability.
  • Visibility of data across the supply chain enables 7-Eleven Japan and Zara to offer rapid response and product changes that synchronize with demand.
  • Learning is achieved by adopting systems to foster continuous improvement, and thus these firms can continue to deliver superior performance for years to come.