How Toyota Selects and Develops Suppliers

February 7, 2010 - Tags:

Interview on August 21, 2008, with Jamey Lykins, Toyota Purchasing General Manager

The purpose of the interview was to understand how Toyota selects and develops suppliers.

Jamey Lykins says that Toyota’s view of procurement is to “cultivate the market and farm it” rather than “hunt for suppliers and use.” He also says that Toyota’s view is that the concept of the market producing a continuous stream of innovations at ever-decreasing prices is a myth—the market has to be fostered and harnessed to generate competitive offerings. That effort requires patience and development of suppliers, among other things. Toyota accomplishes its objectives in many ways.

Toyota developed the idea of supplier pods, which reduce the frictional costs of doing business. These pods are focused on tier 1 suppliers with whom the firm has long-term business relationships. The synergy within each pod is not orchestrated by Toyota; instead, it is nurtured. In addition, Toyota carefully selects suppliers at different tiers that have to be cultivated. In some cases, specific tier 3 or tier 4 suppliers are directly engaged by Toyota to ensure that innovative ideas are nurtured. In return for guaranteed markets for innovations, these smaller companies provide unique research and development capabilities (e.g., tool and die companies or plastic injection molding companies). The need to retain connections even with these small firms is to ensure that the know-how from 30to 40-year industry veterans is not lost.

Not all suppliers are treated equally. Some companies that are closely tied to Toyota face greater-than-market pressures to outperform the market. Jamey cited examples where Toyota engineers and supplier engineers have committed to reducing costs by over 50 percent for some critical parts.

The purchasing manager continuously evaluates suppliers based on the flexibility of the plant to reallocate resources, the capability of the company (i.e., the skill set of the organization), and the competitiveness of the company as a whole. A supplier can be evaluated by Toyota managers who tour the shop floor to examine how it manages tasks, accommodates variability, standardizes work, maintains rhythm on the floor, solves problems, and so on. By watching tasks being performed, observing the layout of parts and steps, reviewing instructions regarding task performance, and so on, evaluators will think of potential outcomes. The “red rabbit” test is also sometimes used to check how long it takes to identify a defect. In this test, a red part is added to the mix and the time until it is discovered is identified. Toyota believes that if all of these issues are managed well, then quality will be improved and costs will be lowered.

If costs remain higher than deemed competitive, Toyota sends a team to work with the supplier to lower costs. In addition, Toyota also provides assistance to suppliers to improve performance. But the group that provides the assistance shares no information with the purchasing group.