Toyota Managing Suppliers

December 21, 2009 - Tags:

Imagine you are a supplier to Toyota. What is your role in the Toyota supply chain? What is your expected productivity improvement over time? How would your experience as a part of Toyota’s supply chain differ from your experience supplying other auto original equipment manufacturers? How would your processes have to operate to synchronize with Toyota’s system? How would you have to adjust organizationally to collaborate with other suppliers to Toyota? How can the v4L framework enable an understanding of Toyota’s supplier management system and its impact across the supply chain? These questions form the basis.

Measured Performance Differences for Toyota and Suppliers

A study by John Henke from Planning Perspectives provides data regarding the supplier Working Relations Index (WRI) across auto OEMs. This analysis includes 1,112 buying situations of OEM-supplier relations. The index ranks OEMs based on 17 criteria, including: “supplier trust of the OEM, open and honest communication, timely information, degree of help to decrease costs, extent of late engineering changes, early involvement in the product development process, flexibility to recover from canceled or delayed engineering programs, etc.” These criteria could thus be classified as focusing on the relationship, communication, help, and profit opportunity.1 In 2005, the working index value for Toyota, Honda, and Nissan was between 298 and 415. The index for Chrysler, Ford, and General Motors (GM) was between 114 and 196. Eightyfive percent of the suppliers to the Big 3 OEMs characterize their relationship as “poor,” with around half the suppliers claiming they would prefer not to do business with the OEM.

Overall OEM—Supplier Working Relation Index for 2002–2006 shows that Toyota’s supplier performance is consistently superior compared to other OEMs, and it has been so over long periods of time. Thus, data suggest that the approaches used by Toyota to identify and engage with a supplier might well be superior to approaches chosen by other OEMs.

In addition, Overall Ratings shows that supplier performance may vary across departments for a given OEM. For example, at GM, which has an overall WRI ranking of 131, the power train area is ranked at 156, while the Body in White group is at a very low 74. All other GM purchasing groups fall in between. In contrast, Toyota scores an overall 407. Toyota’s electrical and electronics group scores a very high 461, while its Body in White group is at 381. The ratings suggest that the purchasing function and Toyota’s management of relationships with suppliers may affect their satisfaction with the working relationship.

The supplier performance is closely correlated with the desires expressed by the OEMs. Suppliers for Toyota, Nissan, and Honda have been observed to be providing greater improvements in product quality year after year than have other OEMs. That increase reflects the priorities for quality versus cost focus by the OEMs. GM has a fivefold focus on cost over quality; Ford and Chrysler a fourfold focus on cost; Nissan a focus on cost 2.5 times that of quality; and Honda and Toyota have a weight of 1.7 on cost versus 1 on quality. Clearly OEMs’ preferences get reflected in supplier performance.

An OESA/McKinsey study suggests that interface costs are estimated at 5.2 percent of program cost. (The interface costs are expenses related to the issues in the WRI.) The study also estimates that 80 percent of the waste in the auto industry is a result of poor supplier management. Such waste occurs because of misinterpretation of product specifications, a poor understanding and/or manufacture of complex parts, and ineffective coordination of capacity and demand. The estimated cost related to such waste is estimated to be $10 billion. Clearly, then, supplier management represents an important supply chain capability. The bottom line is that the way a supplier is managed affects product specifications and innovation, delivery performance, cost, and quality.

Links to Toyota’s Processes

A key feature of Toyota’s selling strategy is to build in schemes that prevent unilateral actions to change volumes or commitments. The use of a consensus approach, fostered by visibility across the supply chain, minimizes actions that result in additional costs at different parts of the supply chain. As discussed in Mix Planning through Parts Ordering, Toyota strives to reduce variability to ensure stable operations by systematic mix planning, careful sales and operations planning, and sensitivity to the impact of product changes throughout the supply chain. Such deliberate planning provides suppliers with phased-in design changes and stable order volumes.

As Toyota Examples of Mix Planning suggested, in order to maintain the guarantee of stability in Toyota’s supply chain, the optimal mix trades off revenue versus the cost impact on operations. As the number of variants offered in each region is reduced, the choices for customers will be more limited. Toyota compensates for this limitation by increasing customer value so that customers are willing either to choose one of the offered choices or to wait for their preferred variant to be available. Thus, for Toyota’s strategy to limit customer choice to be competitive, it must result in a significant improvement in product value to the customer. Given the large role played by suppliers in Toyota’s supply chain, that value creation must begin at the suppliers.

Gary Dodd, former president of Tire & Wheel Assembly, a Toyota supplier, describes the level of collaboration between the supplier and Toyota. The focus on “bad news first” (so that problems identified can be fixed immediately) provides an environment in which suppliers have a greater incentive to offer visibility about their operations. In addition, the level of visibility provided to the supplier about Toyota’s annual volume goals and discussions regarding its feasibility from the supplier’s perspective increase the probability that product and production objectives will be achieved.

Most studies of TQM suggest that stable processes are an important component of improving quality and productivity. Given that suppliers are offered stable order commitments by Toyota, they are expected to use this opportunity to develop superior quality products and achieve productivity improvements. As described earlier, Toyota’s suppliers consistently deliver quality improvements year after year. In addition, suppliers attain productivity improvements by implementing TPS practices. These quality and cost improvements are then reflected in improved customer value. Thus, the supplier responsibility is to capitalize on the order stability and deliver cost and quality improvements to a level that makes the supply chain competitive.

In addition to the quality and productivity focus, Toyota suppliers must be flexible so they can respond to daily order changes. They do not attempt to build ahead based on the forecast but instead wait until the final order is received. For example, a sequence supplier would have to be synchronized with the exact color or mix of products as they move through the production line. But that sequence may be expected to be adjusted in response to changes made by dealers, quality issues, manufacturing backlogs, and so on. Therefore, the sequence suppliers must wait until about four hours prior to delivery to receive the final order.

Choosing Suppliers

At Toyota, choosing a supplier is a long, drawn-out process that involves verifying whether the supplier will mesh with the supply network. In some cases, suppliers are selected because they have innovations that improve processes or decrease costs. Both new and existing suppliers are expected to share their innovations with other suppliers that supply similar products. Thus, being a supplier brings along with it an opportunity to receive ideas generated across the supply network. Toyota’s goal is to minimize the number of suppliers and create long-term partnerships by nurturing existing suppliers to expand and grow with Toyota instead of growing the number of suppliers to induce competitive price bidding.

Individual suppliers receive a contract for a fraction of the total market over the life of a model. Empirical data collected by Japanese economist Asanuma4 suggest that suppliers are promised all of the orders associated with a market segment (e.g., exports versus domestic) or a fixed fraction of a certain market (e.g., a fraction of the domestic market volume) or all of the orders for a particular car model. The goal of the supplier is to maintain delivery performance, high quality, productivity improvements, and so on, over the life of the model. Asanuma’s study suggests little use for the supplier as a source of slack capacity.

Asanuma studied the Japanese auto industry, the rice cooker industry, and the electronics industry. These three industries differ in their product life cycles, ranging from four years to one year to a few months. Some key features in managing suppliers included independent but closely linked suppliers, long-term relationships, frequent collaboration, exchange of employees between companies over long periods, and cross-linked shareholding. The impact has been observed in terms of long-term cooperation in innovation, cost cutting, quick response to demand fluctuations, and high levels of trust. However, the extent of close relationships varies across suppliers and products and over time as is warranted by competitive forces for the end product. Thus, while suppliers often are organized as a keiretsu (a group of companies with investments in one another), their role varies across product type.

Studies of the Japanese OEMs suggest a significant difference between U.S. and Japanese auto OEMs. Published reports show that Japanese auto suppliers won renewal of their contracts 90 percent of the time versus 71 percent for suppliers to U.S. auto OEMs. A study in 1992 found that a typical Toyota plant had only 125 suppliers compared to 800 for the typical General Motors plant. At the corporate level, Toyota had 224 suppliers compared to 5,500 suppliers for General Motors. In addition, Japanese OEMs make about 27 percent of their components in house versus 54 percent for U.S. auto OEMs. While Japanese automakers accounted for 33 percent of world output in 2002, Japanese suppliers accounted for less than 19 of the world’s top 100 auto suppliers. That ratio suggests that Japanese suppliers are smaller than their U.S. counterparts. All of these statistics imply that there are differences between the approaches used by Japanese and U.S. auto OEMs to manage suppliers.

Toyota Supplier Selection

The United Kingdom provides a good example of how Toyota selects its suppliers. A supplier must meet extremely tough conditions to qualify. When Toyota set up its plant in Derbyshire, England, in 1991, it initially started with a list of 2,000 potential suppliers. It reduced that list to 400, which it then evaluated using criteria such as “assessment of management attitudes, production facilities, quality levels, and research-and-development capability.” The final group was whittled down to 150. Some of the candidate companies had been discouraged by the amount of detail that had been requested. Others found that that requirement was to their advantage and held that the advice on improving quality and competitive factors provided by the Japanese technicians saved the cost of employing outside consultants.

Toyota asked its potential suppliers to provide evidence that they could cut costs immediately with improved designs. One supplier came up with a design that was not only cheaper but simpler and better than that of Toyota’s own Japanese supplier. The component was a simple gear stick knob costing pennies, but the British found a way of making it in two plastic parts instead of four, as in Japan. Jim Robinson, Toyota UK’s general manager for purchasing, said: “We get suppliers thinking immediately about cost. In the case of the gear knob, it involves only a small cost. But if that part costs two pounds [approximately US$2.90] today and we can make it for one pound [about US$1.45], that is a huge saving over 200,000 cars a year.”6 He added that some of Toyota’s suppliers have doubled productivity with negligible defects.

Such success helps the whole economy. The change in the auto-parts industry was highlighted by the decision of Daimler-Benz, of Germany, to turn to Britain for component suppliers. More than 30 German executives met 100 British component firms. Dr Gerhard Liener, a Daimler board member in charge of the company’s $35 billion materials purchases from 60,000 contractors in 100 countries, made no bones about why he was in Britain. The arrival of Japanese manufacturers, he said, had helped improve the technological and quality achievements of British supply firms.

Tiered Supplier Organization and Managing Relationships

For the auto OEMs, suppliers are organized into tiers, with tier 1 suppliers being assemblers of systems, who manage all relationships with tier 2 suppliers, and so on. The bottom of the pyramid consists of tier 4 suppliers who form, perhaps, about 40,000 entrepreneurs who own a lot of the intellectual capital that is required to produce excellent components. There are many of those suppliers that own patents, have customized machinery, and may be owned by an individual family. For example, a series of detailed interviews by Nishiguchi7 provides examples of one tier 4 supplier who had 200 patents for a specific process and thus had considerable leverage in the supply chain. Similarly, another supplier offered the flexibility to adjust for demand surges by adjusting his working hours to flex with demand surges. An example examined by Roy Vasher was a situation in which a government regulation required a change in antirust coatings. More than 4,000 parts were impacted by this change, but there were only a small number of suppliers that supplied the coating materials. Thus, Toyota was able to focus attention on a few suppliers to develop the new coating materials to be provided to suppliers that coated the 4,000 parts. Working with these lower-tier suppliers was the key to making the necessary changes in a timely and efficient manner. Purchasing executive Jamey Lykins echoes the idea that Toyota chooses suppliers across multiple tiers so as to guarantee availability of innovative solutions across the supply chain. He describes cases in which Toyota engineers and supplier personnel dedicate a somewhat substantial period of time—say, three months—to solve a seemingly insurmountable problem but succeed through collaboration. Such organizational approaches tap into the knowledge base of the supplier network effectively.

The extent of the business relationship between Toyota and its tier 1 suppliers exceeded 10 trillion yen in 1995. In addition to these 28 companies, in 1995 there were 234 primary parts suppliers and another 77 manufacturers of production equipment and other products. Data collected for the same period showed that, as a result of such a tiered system, 300 purchasing managers at Toyota bought components for 3.6 million cars, thus generating 12,000 cars per purchasing manager.

Pressure on Suppliers to Perform

The pressure on a supplier is maintained by using a staggered system of model changes, which in turn entails a staggered system of negotiations. The usual price commitment by Toyota to a supplier is for a one-year period, and prices are reviewed every six months, but the contract award is kept in place over the model life. The impact is to keep the pressure on a supplier to perform even while offering a long-term contract. The absence of desired performance after winning the contract will jeopardize chances to win a contract for other vehicle models made by the same supplier. This approach balances the stability of orders over a longer time frame with pressure that is uniformly maintained for compliance.

Nishiguchi also suggests that an ALPS system of supplier organization (referring to the jagged outline of the Swiss Alps), with staggered contractual links across vehicle models, provides a secondary source for most components while permitting sole sourcing for a component for a car model. The availability of alternate suppliers, who can step in readily, places pressure on the existing supplier to conform.

Depth of Supplier Relationships

The relationship with suppliers, from drawing-supplied to drawing-approved ones, can vary based on what is being produced. Intermediate relationships exist as well, such as when the OEM provides rough drawings and the suppliers complete all details. A study by Asanuma8 suggests that there could be up to six different levels of relationships between the OEM and the supplier:

  1. The OEM provides drawings and detailed manufacturing instructions (e.g., when small parts are assembled by an assembly-service provider).
  2. The OEM provides drawings but the supplier designs the manufacturing process (e.g., when a supplier is providing stamping).
  3. The OEM provides rough drawings and entrusts the completion of the drawings and the entire manufacturing process to the supplier (e.g., when products are plastic parts used for dashboards).
  4. The OEM provides specifications while the supplier generates the drawings, but the OEM has detailed knowledge about the manufacturing process (e.g., when the product is a seat).
  5. The OEM provides specifications, the supplier generates the drawings but the OEM has limited knowledge about the manufacturing process (e.g., when products are brakes, bearings, and tires).
  6. The OEM purchases the product out of a catalog (e.g., with commodity off-the-shelf items).

Suppliers may provide flexibility during design but are subject to tight monitoring during manufacturing. Studies by Clark and Fujimoto suggest that black box suppliers, (i.e., suppliers that are offered considerable flexibility during product design) constitute a larger percentage of Toyota’s supply base than for other OEM’s. But even this proportion varies across products, as studies by Kamath and Liker indicate.10 They show that the relationship between the OEM and the suppliers is as a parent or as an equal. Their example suggests that for some crucial products, detailed specifications are provided. For other components, the relationship is at arm’s length, with considerable latitude provided to the supplier in product design. In The Toyota Way of Managing Supply Chains we suggest that this decision depends on what stage of development the supplier is at with regard to knowledge and practice of the Toyota Way.

When monitoring the manufacturing process is involved, data show a different pattern. Japanese OEMs exert considerable control over supplier manufacturing processes, requiring information if there is a change such as a substitution in raw material supply or a reset of a machine. The data suggest that this process control enables the OEMs to ensure stable component performance and quality, thus permitting just-in-time delivery and reducing receiving costs. The detailed monitoring of supplier performance requires OEM purchasing managers to spend considerable time at supplier facilities. One OEM even shares one desk and chair with three purchasing managers, the assumption is that no more than one out of the three managers will be in the OEM facility, with the rest being in supplier locations. The Japanese word shukko refers to this type of transplant who may well spend his or her entire career at the supplier facility managing the relationship on behalf of the OEM. The role of the shukko varies from being a temporary shukko to a more permanent one. This flexibility both enables adjustment of the workforce across the supply chain and permits better coordination across the supply chain.

Helper characterizes the U.S. model of supplier management as involving adversarial relationships, easy switching among suppliers, a high level of sole sourcing, low information exchange, low commitment, price-based competition for supplier selection, and a search for new suppliers (if problems arise). In contrast, the Japanese model encourages close relationships, competition over quality, delivery, engineering capability rather than price, high levels of information exchange, high levels of commitment, many suppliers, long-term relationships, and working with existing suppliers to resolve problems.

In addition, suppliers to lean producers are often required to make daily deliveries and to be involved in product development. Thus, suppliers to lean producers often are ensured a reasonable return as long as they make a goodfaith effort to perform as they should.12 Anecdotal evidence suggests that once suppliers win business from Toyota, it is theirs to lose by not performing. The average percentage of suppliers that maintained their buyer relationship was 84 percent in the Japanese auto industry.

Other authors suggest that Japanese OEMs absorb a part of the business risk for their suppliers based on the intensity of the business relationship. Stabilizing the corporate performance of selected suppliers enables improvement in the OEM’s components and product. Nishiguchi reports anecdotal evidence of a Japanese supplier to a U.S. OEM who claims that doing business with U.S. buyers is easy because if things go wrong the supplier only has to claim that the work was due to buyer specifications and manufacturing instructions. (Such excuses are not permitted by its Japanese OEMs.) One supplier provides an example of cable components ordered by a U.S. OEM that ended up being too short for the assembly to be successful. The OEM then announced that the car model was to be discontinued. However, as per the purchasing contract, the OEM paid the Japanese supplier to cover the few months of inventory already in process.

The flip side of this type of relationship is highly unstable orders. A Japanese supplier provides an example of a 50 percent increase in an electrical component by a U.S. OEM. Because past experience suggested that such increases were not real, the supplier collected data from the past and checked whether the order was real. The U.S. OEM purchasing department claimed that it was just passing along order increases from sales and was not responsible for the validity of costs associated with such order changes. The OEM then demanded immediate fulfillment and, if not, airfreight of the order. Such interactions with suppliers would be unthinkable within the Toyota supply chain.

Evans and Wolf compare Toyota’s processes to the open source movement and their product improvements (e.g., Linux). They suggest that Toyota’s processes have a few characteristics that enable their success, namely:

  • Pervasive collaboration tools that have common standards and are compatible with one another
  • Visibility and visual control not fogged by analysis
  • Trust to share intellectual property without fear of abuse
  • Modular view of teams and processes and flexible planning to keep goals aligned with customer needs
  • Encouragement of teams as a vehicle to solve problems

Given marked differences in supplier management by U.S. and Japanese OEMs and the adoption of lean principles for manufacturing, is it important to adopt all of the components of the Toyota supplier management system to be successful? Are there other approaches? Honda, for example, claims a much looser relationship with suppliers and is also successful. For example, authors who have studied Honda over several decades show that adjustments to the balance between cooperation and competition have proven to be a competitive weapon for Honda over a long period of time. The real answer might lie in understanding how the entire supply chain functions and whether the practices are consistent from that viewpoint.

Assisting Suppliers

A key feature of Toyota’s supply chain is the automaker’s role in supplier capability development. Sako14 describes the use ofjishuken at Toyota: “Jishuken is a closely knit gathering of middle-level production technologists from a stable group of companies who jointly develop better capabilities for applying the Toyota Production System through mutual criticism and concrete application.”

Sako describes an example from the late 1990s involving 56 factories from 52 separate suppliers that accounted for 80 percent of the purchasing costs spent by Toyota in Japan. Each jishuken company chooses a specific theme but works within the broad policy direction set by Toyota’s Operations Management Consulting Division. Toyota does not charge for its consultant’s time but makes it a resource that can be used by the Toyota Group. The supplier typically hosts a study over two months. Toyota’s senior engineers visit the supplier three times every two months while junior engineers from Toyota visit more frequently. Members of the jishuken group meet every week. The study sessions consist of concrete performance targets such as productivity, cost reduction, inventory turns, and the like. Most of the kaizen ideas suggested are implemented during the two months. At the end of the year, jishuken groups gather in one location to present their achievements.

There are two types of assistance provided: individual and group. The individual assistance is provided to get some quick results. The focus is to deal with an immediate supplier problem such as a sharp drop in profits or difficulty in keeping up with a model launch. Toyota’s experts then go to the supplier, observe, and suggest improvements. These improvements get quick results but do not ensure that the supplier has imbibed the underlying principles. The jishuken group develops supplier personnel and also assists Toyota. As a result of frequent jishukens, Toyota retains the manufacturing know-how for components it does not produce in-house. That approach enhances Toyota’s capability to do target costing—a technique to manage and reduce costs over a product’s life cycle.

In another example, during the recession in Japan, only three of its main suppliers saw profit increases, while 57 saw profit and revenue decreases. Toyota responded by creating a kaizen promotion section within its purchasing department. The group worked with suppliers to decrease pay and cut investments and thus enable recovery of loss. In addition, suppliers were able to enhance their long-term capability. All of this works on an informal, personal level. To prevent supplier information gathered by these working groups from being used to extract cost reductions, supplier productivity improvement results may not even be communicated to the purchasing group. Data seem to suggest that the supplier is permitted to keep the gains from improvement due to Toyota’s assistance.

Data collected from suppliers suggest that plants that supply Toyota have a 14 percent higher output per worker, 25 percent lower inventories, and 50 percent fewer defects than operations that supply Toyota’s rivals.15 Between 1965 and 1992, Toyota and its suppliers increased their labor productivity by 700 percent. During the same period, U.S. automakers and their suppliers improved productivity by 250 percent and 50 percent, respectively.

In the United States, Toyota has created the Bluegrass Automotive Manufacturers Association (BAMA), modeled after the Japanese supplier association. The supplier association holds general meetings bimonthly where production plans, policies, market trends, and the like are shared with the supply network. In addition, committee meetings are held monthly to focus on quality, cost, safety, and social activities that benefit all members of the network.

Like its organization in Japan, the Toyota Supplier Support Center (TSSC) in the United States requires that suppliers who use its services share their results with others. Doing so allows best practice suppliers to be showcased and encourages supplier openness. Toyota believes that the ability to see a working solution increases the chance that suppliers can replicate that knowledge. Most projects take at least one and a half years or longer from start to completion. Summit Polymers is an example quoted by Dyer and Hatch.16 Toyota consultants (two to four personnel) visited Summit every day for four months to provide ongoing support for the next five years. In the United States, TSSC suppliers have seen productivity (i.e., output per worker) increase by 123 percent and inventory reduced by 74 percent. Continental Metal Specialty (CMS), a supplier of metal stampings, found only four value-added steps out of 30. Toyota and CMS jointly reconfigured the production system and, through process changes, eliminated 19 steps. Setups were reduced from 2 hours to 12 minutes. Inventories were reduced to 10 percent of the original levels. The chairman of CMS claims that 75 to 80 percent of the learning from their customers has been contributed by Toyota. Suppliers also got to keep all their benefits. Ultimately, Toyota does reap benefits during annual price reviews through a target pricing exercise in which customer price is defined and used to work backward to a supplier cost target.

The jishuken concept is called the “plant development activity” (PDA) in the United States. Because PDAs are context-specific, they permit transfer of tacit knowledge. In the United States, Toyota purchases lower volumes than U.S. automakers. However, Toyota still provides suppliers with knowledge and technology to improve their productivity, and the company sends personnel to visit supplier plants an average of 13 days per visit (versus 6 days for the U.S. automakers). Such assistance showed that suppliers decreased defects for Toyota by 84 percent (versus 46 percent for the U.S. automakers), decreased inventories for Toyota by 35 percent (versus 6 percent for the U.S. automakers), and improved sales per direct employee by 36 percent (versus 1 percent for U.S. automakers). All of these results were achieved in plants that supplied U.S. automakers.

Steven Spear, in a detailed study of process specifications at Toyota and its suppliers, describes the processes as follows: The process starts with a description of a pathway rule that specifies system design and decides who receives the product. The next specification is a connection rule that decides how requests will be made to this supplier. The activity rule specifies work content, timing, sequence, and outcome. Finally the improvement rule specifies who is responsible for resolution of problems, specifies a qualified teacher for assistance, and so on. That sequence of specifications of processes guarantees that the process as well as its improvement mechanisms is identified in advance. Such a process specification permits adaptability in the face of disturbances, external changes, and emerging opportunities. That sequence also conforms to the learning principles we identify throughout.

The CCC21 System

In 2000, Toyota announced a plan to cut costs by 30 percent across the board for parts it buys to guarantee that it retains its competitive edge. By 2005, the program had already saved $10 billion over five years, but it had done so while improving quality (Toyota cost cutting results).

In addition, for about 180 key parts the team identified the world’s most competitive suppliers and created benchmarks for the supply base to meet. In one case, the number of air-conditioning vents was decreased from 27 to 3, generating a 28 percent cost reduction. Why 30 percent? The number came from the commonly called “China price,” that is, the expected price drop by moving orders to Chinese suppliers.

The following is a summary of the results achieved from that special initiative, CCC21.

Innovation at Toyota

When it comes to being innovative and making fundamental changes in the organization, Toyota has shown that size does not matter and even a giant can reinvent itself.

In July 2000, Toyota launched the Construction of Cost Competitiveness in the 21st Century program, also known as CCC21. That initiative focused on cutting the purchasing costs of 170 major components. Katsuaki Watanabe, Toyota’s president and CEO, spearheaded this effort because he was then a purchasing specialist. This program brought together engineers from Toyota and the parts suppliers, eliminating unnecessary costs with methods such as standardizing parts across the entire Toyota range or reducing the number of components required to make a part. For example, reducing the parts in a horn from 28 to 22 led to a 40 percent savings in cost. In another example, Toyota helped to improve suppliers’ economies of scale by approving 3 inside hand grips, down from 35. At the end of five years, the program led to a total savings of US$9 billion.

Never satisfied with its success, Toyota started the Value Innovation (VI) program in 2005 to follow up on the CCC21 program, which goes beyond lean manufacturing to lean product development practices. The VI program refocused Toyota on the production and design processes, continuing its quest for waste elimination and cost reduction. Toyota expects the VI program to show its main benefits by 2010, raising the operating profit margin from 9.3 percent to 10 percent.

What happens when that goal is achieved as well? Toyota already is thinking of plans to use the benefits of the VI program to invest in technologies, researching new vehicle structures that will reduce weight and lower fuel consumption.

Toyota Checklist for Supplier Audits

The Toyota purchasing organization expects suppliers to be available for comprehensive system audits. The audit process specifies the goals and the associated documents that will be used to check for confirmation of compliance. The Comprehensive Assessment Tool (CAT) rates the supplier on a scale from 0 to 5 on a set of specific performance measures, namely:

  1. Mission
  2. Reporting structure
  3. Involvement of top management
  4. Localization and self-reliance
  5. Open mind to operating procedures such as kaizen
  6. Organization with respect to Toyota interactions

For each of the measures, equal weight is allocated to subparts such as vision, long-term plan, annual plan, finances, and risk management. The evaluation score out of a maximum of 100 units is used to provide a supplier assessment score.

To provide data to support its adherence to processes, the supplier in turn is expected to list procedures in place to accomplish each of the stated tasks. Those specific procedures include tracking to improve quality, scrap handling, poka yoke management, warranty claims handling, returns processing, offline inspections, and final shipping.

Supplier Guest Engineers

One key coordination mechanism used at Toyota is the role of supplier guest engineers at Toyota’s facility. The guest engineer is typically a specialist, employed by the supplier, who resides in the OEM’s (Toyota’s) organization. The role of this engineer is to provide tacit knowledge during product development and thus facilitate integration of the supplier’s expertise with the OEM’s needs.

The common approach is for suppliers to send its design engineers to Toyota to work for two to three years prior to product launch. After product manufacturing starts, the design engineers return to their company and production engineers are sent to the OEM. Production engineers ensure that components are assembled correctly in the vehicle. They also report problems, suggest design changes for easier manufacture, and propose approaches for cost reduction. Finally, the supplier development engineer’s role is to see to it that kaizen processes are implemented.

Significantly, Toyota had 5 design engineers per supplier while General Motors had 0.2 guest engineers per supplier. The roles played by the guest engineers are shown in an empirical study by Daniel Twigg.19 The study also found four types of roles by guest engineers at an OEM location, from preconcept to concept to product development through production phases.

The presence of supplier personnel within the Toyota facility enables faster changes in response to failures, quicker adjustment to information generated from customer complaints, chances to reduce engineering change order processing times, and opportunities to generate kaizen-type cost improvements, among other things. These shared resources allow effective coordination between the supplier and Toyota. What is the benefit to frequent interactions with a supplier? A study by Dyer20 suggests that defects decrease with increased supplier interaction.

Supplier Location Decisions

Toyota’s planning for assembly plant sites assumes that most suppliers will be located at a reasonable distance from the assembly plant and that their delivery schedules will permit efficient operation of the assembly plant to produce vehicles based on the final vehicle mix and sequence. The low lot sizes of assembly plant parts orders imply that suppliers need to be located close to the assembly plant.

Toyota suggests that a planning rule be used of 50-mile-per-hour travel time from supplier location to assembly plant. That assumption is one factor that is used to determine when supplier parts orders are released. Many suppliers choose to be located close to an assembly plant. In Japan, 85 percent of the volume comes from suppliers located within a 50-mile radius of a plant (i.e., within a one-hour drive). In North America and Europe, the goal is for 80 percent of the parts to be delivered within three to five days lead time.

Similarly, supplier location closer to the OEM results in lower inventories for the supplier and assembly plant. For Toyota in Japan, the average distance is short, in contrast to other OEMs. The resulting inventory as a percentage of sales is thus the lowest of the OEMs.

So, what can a supplier expect? Suppliers need to consider building factories near Toyota plants, especially as Toyota continues to expand and build new plants around the globe. The proximity of supplier location to the Toyota plant enables frequent deliveries to be made to the assembly plant, and in return, observed lower inventories at the supplier and the Toyota plant. In addition, the completed vehicle has fewer defects, because frequent interaction due to more deliveries enables quick feedback and more opportunities to fix defects.

Reflection Points

This articles provides a rich context to review the use of the v4L approach in managing suppliers at Toyota. There are several good examples of how the learning principles are applied and linked to the v4L framework:

  • Variety of components produced by suppliers is consistent with their flexibility. Because designs of components allow efficient manufacturability by suppliers, suppliers can reliably commit to capacity.
  • Velocity of the parts flow is matched between the assembly line and suppliers. Sequence suppliers receive orders in the precise sequence of assembly. Other suppliers have orders picked up during delivery milk runs to Toyota. In short, the supplier velocity is matched to the assembly plant production rate.
  • Variability of orders to suppliers is stabilized through communication of planned volumes in advance, through JIT pickups and by limiting the amount of day-to-day fluctuation in orders.
  • Visibility of supplier operations and of Toyota plants is encouraged by the approach at Toyota to discuss problems first. The attitude that it is better to inform Toyota of problems early so as to enable efficient solutions with the company’s assistance encourages increased visibility. In addition, frequent deliveries from suppliers ensure that Toyota is constantly informed about those suppliers’ performance.

Learning by the supplier system is guaranteed by the various supplier organizations as well as by proactive steps such as the CCC21 program, which continually emphasize the need to reduce waste and increase efficiency. The following are some of the key steps taken by Toyota and the suppliers to achieve that goal:

  • Create awareness. Constant pressure is placed on suppliers with a staggered system of model changes, supplier audits, and programs such as jishuken.
  • Establish capability. Long-term relationships are carefully nurtured. Suppliers are involved at early stages of design and given ample scope to explore options and alternatives. Jishuken teams create capability both at the supplier as well as at Toyota for understanding how each other’s systems function.
  • Make action protocols. The work by the Toyota Supplier Support Center helps share best practices across the supply chain. The relationship-building process with the supplier is itself carefully planned and organized to maximize impact.
  • Generate system-level awareness. A modular view of teams’ processes and flexible planning are used to align the supply chain to the needs of the customer. Trust is fostered at the same time that value creation is emphasized.
  • Exercise control of processes. Once the design is finalized, control is exercised on processes as if they were in-house systems.
  • Facilitate communication. Communication is facilitated with a variety of methods, among them being that Toyota engineers are stationed for long periods at the supplier and the supplier’s guest engineers are stationed at Toyota.
  • Provide stability. Stability is provided to suppliers that require such support by absorbing business risk at times of difficulty.