Toyota adopts different planning methods depending on which types of parts are involved. Some of the planning processes are unique to Toyota and so are worth contrasting with general practice. There are many parts ordering processes for the different categories of parts. The four broad part categories are local parts, long lead time parts, in-house parts, and sequenced parts:
- Local parts are parts supplied by suppliers located within the same global region as the assembly plants. For example, parts supplied by North American suppliers to assembly plants located in North America would be considered local.
- Parts supplied by Japanese suppliers to North American and European assembly plants would be considered long lead time parts.
- In-house parts, such as body panels, plastic bumpers, and engines, are produced at the same site as the assembly plant.
- Sequenced parts are produced at suppliers located near to the assembly plant. Those parts are shipped to the assembly plant in the exact sequence of the vehicles being produced. A typical sequenced part for assembly is seats.
Each of these categories of parts has a unique parts ordering process that is described. Note that the use of the term “parts” broadly includes individual parts as well as component assemblies. Also, parts orders are issued for parts and assemblies that are shipped from tier 1 suppliers to the original equipment manufacturer (OEM), which in this case is Toyota. The tier 1 suppliers are responsible for ordering their parts and materials from their suppliers.
Common Parts Ordering Processes
Some prerequisite processes are common to all of the parts ordering categories. These are necessary parts quantity calculations, parts and supplier master database maintenance, and parts forecasting. Each of these processes will be explained in the following paragraphs.
Necessary Parts Quantity
The necessary parts quantity calculation process translates the vehicle specification into the parts and components necessary to build the vehicle. The process uses a production schedule like the one discussed in Toyota Production Scheduling and Operations and a Toyota specification database that is similar to a bill of material (BOM). The specification database is maintained by the engineering group and contains all of the specifications of each vehicle structure, including the necessary parts required to build each vehicle. The specifications are used by many functions within a manufacturing company including engineering, purchasing, manufacturing, and parts ordering. Toyota refers to its version of the BOM as the Specifications Management System (SMS). Because Toyota produces many of the same vehicles at plants around the world, it is imperative that the SMS database be the same source for vehicle structures.
Each plant also maintains a subset of the SMS database that provides the parts list for the vehicles produced at the plant. This database is the Plant Specifications Management System, or PSMS. Each parts ordering group uses the PSMS to identify the necessary parts and quantities required to build each vehicle. A key point here is that each unique vehicle build combination will have a different set of parts. For example, assume there are two vehicles with almost identical specifications:
- Vehicle A: Blue, four-door sedan, four-cylinder engine without spoiler
- Vehicle B: Blue, four-door sedan, four-cylinder engine with spoiler
The only difference between the two is that vehicle B has a spoiler; therefore, it would seem obvious that the only differences in the parts requirements are the spoiler and fasteners needed to attach it to the trunk. However, many spoilers contain a backlight. So, in addition to the spoiler parts, additional wiring harness parts are needed. This example emphasizes the need to consider each unique vehicle combination when performing the parts calculation.
The output of the necessary parts calculation process is a complete parts list along with the quantities needed for each vehicle. As will be explained later, Toyota retains the parts requirements by individual vehicles and does not aggregate the quantities by part number until the parts order is generated. In addition, each part is classified as local, long lead time, in-house, or sequenced.
Parts and Supplier Master
Another common process is to maintain a parts and supplier master database. The parts master contains information such as part name, supplier, lot size, and vendor share. Vendor share is used to allocate shares when a part is sourced to multiple suppliers. For example, one of three brands of tires might be installed on a vehicle. In our example, the share to each supplier could be Brand A, 40 percent; Brand B, 30 percent; Brand C, 30 percent. The supplier master contains information such as supplier name and location, lead time, and shipment frequency. The plant parts ordering groups maintain these data on an as-needed basis because they are closer to the actual operations. Of course, if significant changes with supplier volume or new suppliers occur, then purchasing would need to be consulted and assist with the supplier negotiations.
Each week, a 13-week rolling forecast is sent to all suppliers to provide them with guidance for future orders. The forecast gives suppliers an estimate of future orders so that they in turn can send forecasts to their suppliers. In some cases, long lead time component parts or raw materials may need to be ordered as a result of the forecast. For Toyota suppliers, the forecast is fairly consistent from week to week because, as discussed in Production Scheduling and Operations, the strategy of Toyota is to heijunka (or “to smooth”) the production schedule.
The forecast is created by summarizing the parts requirements by production week. As explained in Production Scheduling and Operations, production is scheduled by production week. The process is straightforward: After all of the necessary part quantities are determined for each vehicle for the three-month rolling production, they are summarized by part number, by supplier, and by production week. Then the quantities are divided by the lot size to determine the number of lots to order for each part number for each supplier. Sample Parts Forecast shows a sample parts forecast. Note that the lot size will vary by part number. In addition, the number of lots forecasted by week may vary, but that variance will be minimized because of heijunka.
The forecast and parts orders are communicated to the suppliers either by Electronic Data Interchange (EDI)2 or via a supplier Web portal.
Local Parts Ordering
Local parts usually represent the largest number of part numbers. For each vehicle type there could be 300 to 400 suppliers that are located within a few days’ travel time from the assembly plant. Although the suppliers receive a weekly forecast from Toyota, they must wait until they receive the final daily order prior to preparing the shipments. The final order is transmitted to the suppliers each day.
The formula for calculating the daily parts order is very precise in order to ensure that each part for each vehicle arrives so that it can be installed at the line side station in the assembly plant just-in-time. The following are key items that are used in the parts order calculation:
The necessary parts quantities calculation for each vehicle
The operating condition at the assembly plant:
- The last vehicle lined off (the vehicle URN that was the last one off the line at the end of the previous day’s production)
- Current operations schedule based on latest overtime plan by day
- The installation point on the assembly line where each part is installed and time offset calculated backward from the end of the line
- Prior-day usage of parts based on kanban
Key information for each supplier:
- Part numbers for each supplier
- The lot size for each part
- The location of the supplier’s plant and the lead time from the supplier’s plant to the Toyota assembly plant
The objective of the daily parts ordering process is to send orders to each supplier for parts that will be needed for production based on the supplier’s lead time.
The first step is to determine the adjusted vehicle production schedule based on the latest operating conditions. In Toyota Production Scheduling and Operations we demonstrated how vehicles are scheduled by production day and then sequenced within each day. That sequence will be the production plan, if everything at the plant runs on schedule. That assumption is a big one, because many things can happen to cause the plant to get off schedule. Therefore, each day prior to the determination of the daily parts order, the day-to-day production schedule is reset. The revised production schedule is created by starting with the last vehicle lined off and working backward to determine how many vehicles will be built each day based on the current operating plan. The daily operating plan is updated each day to reflect changes in daily overtime and/or working hours and days. For example, if at the end of the prior production day there was an equipment problem that caused the plant to lose three hours of production, then that lost production would most likely be made up by working overtime the next three days. Look at Plan versus Actual Production Adjustment to see the effect of this shift in the production schedule. The table reveals that on day two the actual vehicles produced were 850 versus the plan of 1,000. It means that the plant is 150 vehicles behind the plan. Therefore, the daily schedule will be revised showing 150 vehicles will be made up over the next three days. Observe the emphasis on not reacting too quickly, on smoothing the rate to ensure that the system is not stressed unduly, and the precision with which shortfalls are made up.
The importance of the adjustment is that if the parts were ordered based on the original plan, then the parts would be arriving at the plant ahead of the time needed. The result would be too much inventory at the plant. Too much inventory in the Toyota Production System is considered muda, or waste; thus, the schedule is adjusted to avoid ordering too many or too few parts.
Another factor used to determine when to order each part is the actual lead time for each supplier. To illustrate this point, refer to Order Lead Time. This table shows a situation where a daily parts order is to be placed to two suppliers with different lead times. Part PN-001 is supplied from supplier S-10001, and the lead time is four days. This order will be issued on the sixteenth of the month for vehicles that will be produced on the twentieth. Part PN-003, on the other hand, is supplied from supplier S-20001 and the lead time is two days, so the order will be issued on the eighteenth for the same vehicles to be produced on the twentieth. The same process is repeated for all parts and all vehicles in the schedule until the part with the longest lead time has been ordered.
Keep in mind that all parts for a vehicle will not be ordered on the same day because each part may have a different lead time, depending on each supplier’s location. Specifically, the aggregate order for parts is always linked to specific vehicle orders! This real-time connection between parts ordering and actual vehicle requirements keeps the supply line taut and coordinated throughout the manufacturing and supply systems.
Once the initial requirements are determined for each part, several adjustments need to be made before the order is finalized:
- Specifications may change in the vehicle content after parts have been ordered because dealers can change some specifications up to five days prior to production. That could mean that some parts that were ordered prior to the five-day freeze point were ordered incorrectly. Therefore, after the final vehicle specifications are known, parts ordered based on the tentative specifications must be compared to the parts requirements based on the final specifications, and an adjustment is added to or subtracted from the next order.
- Usage variations because of scrap, misuse, or inventory loss adjustments are calculated by comparing the actual usage based on the internal kanbans to the expected usage based on the necessary parts calculation of the final vehicle specifications. These adjustments are added to or subtracted from the next order.
- Operating conditions may also necessitate miscellaneous adjustments that can also be manually added or subtracted.
Although this process may seem very similar to the traditional MRP,3 there is one significant difference: traditional MRP systems rely on the parts inventory count to determine what is on hand and on order. The inventory quantity is then subtracted from the total parts requirement to determine the quantity to be ordered. One risk in using inventory quantity in the parts calculation is that it does not automatically adjust for scrap and/or misusage. Moreover, the connection between orders and parts gets broken in most MRP systems. It may exist through information linkages, but not as tightly as Toyota intends—the company aims to keep the physical vehicle orders and parts orders tightly coupled. That is achieved by insisting on accurate specifications, keeping vehicle parts requirements separate, planning on adjustments on a frequent basis instead of weekly or monthly, and by grouping parts that need different types of controls and planning systems.
Once the quantities of each part and supplier have been determined, the actual order by lot and shipping time needs to be determined. One of Toyota’s philosophies is to have “small lots, frequent deliveries,” so most suppliers will have multiple shipments per day, or at least one shipment per day. The following is an example of a final parts ordering calculation:
- The number of parts required (130) less carryover (0) equals parts to be ordered (130)
- The parts to be ordered (130) divided by lot size (25) equals 6 lots and 20 carryover (Note: always round up to the next lot; the carryover will be subtracted from the next day’s order.)
- The number of lots (6) divided by the number of shipments per day (3) equals 2 lots per shipment
Long Lead Time Parts Ordering
Long lead time parts are handled differently than locally procured parts. The reason is quite obvious: long lead time parts must be ordered several weeks in advance of production. For example, most of the long lead time parts for Toyota’s North American and European plants are shipped from Japan with a lead time of about six weeks. But this means that there will be some inaccuracies because the final vehicle specifications are not frozen until about five to ten days prior to production. The final freeze point varies by each plant and is based on local lead time conditions. The general rule of thumb is that 80 percent of the local parts lead time should be shorter than the final freeze point. For example, if the freeze point is five days, then 80 percent of local parts will have a lead time of five days or less.
Another factor that makes the planning tricky is that the work schedules are different in Japan than in North America or Europe, and in some cases they vary by country. For example, Canada celebrates Thanksgiving in October, whereas the United States celebrates it in November. Japan does not recognize Thanksgiving, but the country shuts down in May for Golden Week.
To accommodate these differences each month, the working calendars of each plant are mapped to the working calendar of Japan. Working backward from the production schedule at the overseas assembly plant, each day’s vehicle schedule would be mapped back to the day it must be shipped from Japan. That procedure gets a little more complicated because a production day of June 15 in the United States means that the parts must be ordered from Japan around May 1, assuming a six-week lead time. The actual shipment time is about four weeks, so these parts would be shipped in early May to arrive at the overseas plant on June 15. Now, if there is a holiday in Japan during early May, then the parts ordering schedule must be shifted to ensure that the shipment date is met. The process of mapping these schedules is sometimes referred to as a “rundown.”
Refer to Long Lead Time Parts Rundown Schedule to grasp how the concept works. In the example, the daily production rate for the week of June 15 is 1,000 vehicles per day. Therefore, the parts required to build these vehicles will be shipped four weeks earlier, or the week of May 18. So when the daily work schedules are the same, the shipping and production will mirror each other.
But bear in mind that May 22 is a holiday in Japan. In Long Lead Time Parts Rundown Schedule, you can see that the parts required to build the 1,000 vehicles are spread evenly over the first four days of the week. The result is that 1,250 equivalent vehicles of parts will be shipped each of the four days preceding the holiday. Note: if the capacity in Japan cannot absorb this daily increase, then the pull ahead would be spread across more days. Keep in mind that the parts shipments are based on the exact sequence of the vehicle production, on the daily production schedule and vehicle sequence within the day. In other words, the 250 extra vehicle parts added to each day would not be the original vehicles scheduled for Friday. Thursday’s shipments would consist of 1,000 of Friday’s plus 250 from Thursday’s. Wednesday’s would consist of 750 of Thursday’s plus 500 from Wednesday’s. This pattern would continue until all of Friday’s shipments were made up. Again, you can see from this example that it is extremely important to order parts based on the planned build sequence within each production day to maintain a tight link between parts delivered and associated vehicle specifications. This rundown schedule is created at the beginning of the order month; however, the actual parts orders are released on a daily basis.
As with the local adjustment process, the daily order for long lead time parts will include adjustments. Most of the adjustments will be the result of specification changes made by dealers after the initial parts order is released for the long lead time parts. Because of the long lead time, the adjustments could be considerable. Typically, Toyota caps the allowable change for long lead time parts to 10 percent. They do so because safety stock must be kept for the maximum weekly change allowance times the number of weeks of lead time. For example, if the normal weekly order for a part is 1,000 units and the allowable change is 10 percent, then the safety stock required to absorb these changes would be 600 units. The calculation is as follows: 1,000 10% 100 per week, 6 weeks 600 units of safety stock
An example of how Toyota continues to learn and kaizen its operations is the modifications the company has made to its long lead time parts ordering process over time. When Toyota initially began production at overseas plants, the company had a very simple approach to ordering long lead time parts. The approach was to take the total quantity of parts required for a month and divide by the number of production days and place a daily order based on the average parts per day. What Toyota learned was that there were special circumstances when this approach did not work. One of these circumstances was when there was a running change implemented midmonth at a plant. A running change during a month would result in both a shortage of the old part and an overflow of the new part.
Midmonth Parts Change illustrates this problem: the 100 pieces of the old part were needed during the first half of the month, and then the new part was required for the last half at the same 100-piece rate. The problem is that if parts were ordered based on the average of the usage of both parts over the month, the daily order would be 50 pieces of both parts over the month. At that rate, a shortage of the old part would be created as well as too many of the new parts during the first half of the month.
Once Toyota management analyzed this problem, they changed the method of ordering based on the daily production plan and sequence. This is another example of why the method of ordering based on the daily production planned sequence is so important.
In-house Parts Ordering
In-house parts are parts produced at the assembly plant—for example, stamping parts and plastic parts. There are two primary methods for ordering in-house parts: internal kanbans and sequenced orders.
The word kanban literally stands for the word card. In its simplest form, the planning department assigns a specific number of kanbans for each part that is ordered by a user department from a supplier department. Each kanban (or card) authorizes the production of a fixed number of parts that are to be placed in a container. Each full container and the accompanying card are transported to the user department. When the user department runs out of the part, before it starts using the parts from a full container, it removes the card from the container and places it on a kanban post. The kanban is then moved from the post to the supplier department, thereby authorizing the supplier department to make another full container. The supplier department cannot produce unless there is a kanban. Thus, the number of parts in circulation at any one time can never exceed the number authorized by the kanbans. Numerous articles have been written about the different types of kanbans and calculations of kanbans. Therefore, we do not dwell on these details here.
Sequence Parts Ordering
Sequence parts are parts such as seats and wheels ordered from a supplier at the time the vehicle enters final assembly. The supplier then builds and ships these parts in the exact sequence as the vehicles are being built. The actual order is generated by sending an electronic transmission to the supplier based on a radio frequency scan of the vehicle number as it starts down the final assembly line. The order is not sent earlier than that because prior to final assembly the vehicle can get out of sequence during paint operations. The time between when the signal is sent to the supplier and when it is needed on the assembly line varies. It could be as many as five hours and as few as two. The supplier does not keep stock of these parts because it is impossible to provide a service level of 100 percent with some types of parts (such as seats). Suppliers build the parts upon receipt of the orders and ship them in the precise sequence in a truck every 30 minutes or every hour. Clearly, significant resources are expended to develop supplier capabilities to accomplish this level of performance (as described in Managing Suppliers).
- Variety of parts is managed by linking parts delivery to production sequence, particularly for sequence suppliers. Mix planning ensures that the aggregate mix across options is stable.
- Velocity of parts flow is directly linked to production sequence and takt time; thus, supplier velocity is tied to production velocity.
- Variability of orders is controlled by heijunka at the plant, which prevents large order fluctuations of the supplier orders.
- Visibility is maintained by tightly linking deliveries and lots to production sequence, which permits dealer order changes to be accommodated by direct adjustments to part orders.
The following are several examples that demonstrate how Toyota extends its learning across the extended enterprise:
- Create awareness. In the parts ordering process, the deviations are immediately noticeable because there is little or no inventory. The only action that is taken in most cases (except for long lead time parts) is to slow down or halt production. That slowdown or stoppage creates a sense of urgency to identify the root cause of the deviation and to implement both short-term and long-term countermeasures.
- Make action protocols. Adjustments to working production days are absorbed by the production schedule by maintaining the sequence of production to match shipments. There is constant effort to scientifically experiment with lead times and lot sizes.
- Generate system-level awareness. Changes in specifications for a vehicle are directly linked to parts changes and thus orders to suppliers. A common specification management system enables many functions to understand the impact of making changes to designs.
- Adapt processes . Tailor its parts ordering system according to the specific type of parts ordered. That accommodation makes it easier to link to other supply chain processes and thus make deviations across the supply chain evident to everyone. Toyota achieves that objective by keeping the physical product orders and parts orders tightly coupled.