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Toyota Supply Systems

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Companies working to learn from Toyota to build high performance supply systems seem to want to skip over the hard work of developing effective supplier partnerships, looking for easy solutions through supply chain software and aggressive price reduction approaches. Toyota’s approach in North America provides a model for building a successful lean learning enterprise from the ground up. The process can be summarized by the following steps.

1. Become a Role Model Lean Customer

You can’t teach suppliers what you yourself have not yet mastered.

Toyota worked hard to develop the Toyota Way of management in North America, teaching American managers the philosophy. A common complaint we hear from suppliers who work for U.S. auto assemblers is that they’re asked to do things that the assemblers themselves do not do or are unable to do. The complaints range from a particular way of documenting the processes to inefficient processes within the customer that drive their costs higher. For example:

Our product development costs as a supplier are included in the piece price. But [American Auto] is redesigning themes for the vehicle two to three times after the program is officially launched, and we will spend $3 million in engineering time when we budgeted $1 million in the piece price. No one at American Auto seems to understand there is a budget out there. It can escalate. It seems free to them.

It is difficult to change fundamental operational practices and to improve. It’s seductive to simply push demanding requests onto suppliers and avoid internal change. But asking suppliers to do what the customer cannot will undoubtedly appear hypocritical to suppliers. The customer should start by getting its own house in order.

2. Identify Your Core Competencies

Outsourcing entails more than simple make-buy decisions.

Outsourcing can lead to lower cost and higher flexibility. But it’s also important to carefully consider what competency you should retain in-house. By focusing on core competencies, Toyota can outsource a great deal of the vehicle development and manufacturing. However, its definition of core competency is much broader than that of many auto companies. Toyota sells, engineers, and makes transportation vehicles. The key question: When Toyota outsources up to 80 percent of the vehicle to suppliers who controlled technology for them and all its competitors, how can they excel or distinguish themselves? If a new technology is core to the vehicle, Toyota wants to be an expert and best in the world at mastering it. They want to learn with suppliers, but they never transfer all the core knowledge and responsibility in any key area to suppliers.

For example, Toyota’s most aggressive development project in recent times was that of the Prius hybrid vehicle. A core part of the computer system is called the Insulated Gate Bipolar Transistor (IGBT), a switching device that boosts the voltage from the battery and converts it to AC power for driving the electric motor. Toyota engineers were not experts at designing or building semiconductors, but rather than outsource this critical component, they developed it and built a brand new plant to make it—all within the tight lead time of the Prius development project. Toyota saw hybrid vehicles as the next step into the future. They wanted “self-reliance” in making that step. Once they had that internal expertise, they could selectively outsource the manufacturing.

Simply speaking, if a company does not have the internal competency to control the technology, they are at the whim of their suppliers. Since their suppliers are free agents and can supply that technology to anyone, the parent company cannot use that technology as its competitive advantage. Also, it is difficult to understand the cost structure for a particular part unless you have the capability to develop and make that part.

3. Develop Your Core Suppliers

Make sure their systems and philosophies are compatible with yours and they’re at a comparable level of operational excellence

A chain is as strong as its weakest link. If your suppliers are not as capable as your own internal operations, you must develop them to that level. Obviously you can’t develop hundreds of suppliers for everything from major modules to nuts and bolts. Toyota has developed a tiered structure. The top tier supplies major subassemblies or even modules that are sent to their engine and assembly

plants. Toyota will work most closely with these suppliers and expect them in turn to manage lower-tier suppliers. On the other hand, Toyota will also directly manage critical lower-tier suppliers of major raw materials and components or common parts. For example, Toyota has very exacting specifications for steel and so will direct its suppliers to work with specific steel suppliers it has worked closely with to develop.

If you’re starting out down this journey and still in the process of getting lean internally, you need to start small and selectively. Your internal lean experts should first get busy fixing your own underperforming systems. You might start on selected projects with a few of your most important suppliers. Do not be surprised if they are as advanced in lean as you are and that you can in fact learn a thing or two from them.

4. Use Control Systems for Continuous Improvement

Strip down your bureaucratic systems and procedures to a critical minimum required to manage the supplier relationship.

We saw that Toyota is focused on control of the supply base, more than one might think. They use ownership in joint ventures, separate divisions dedicated to their business, meticulously kept metrics, and demanding quality expectations to keep suppliers on track. A supplier hiccup can lead to a small army of Toyota engineers swarming the supplier to find and fix the problem.

While suppliers view Big Three procedures as highly bureaucratic and coercive, Toyota, which uses equally stringent quality methods and procedures, is viewed as enabling. An American automotive interior supplier described working with Toyota in this way:

When it comes to fixing problems, Toyota does not come in and run detailed process capability studies 15 times like the Big Three. They just say, ‘‘Take a bit of material off here and there and that will be okay—let’s go.” In 11 years I have never built a prototype tool for Toyota. Knee bolsters, floor panels, IPs, etc., are so similar to the last one, it’s not necessary to build a prototype. When there is a problem, they look at it and come up with a solution—focus on making it better, not placing blame.

On the other hand, Toyota has a far more elaborate system for cost management than most of their competitors. Cost models, as discussed in the Delphi case at the end of the chapter, can be used to estimate what supplier cost should be and to design the product to a target cost. These cost models are very sophisticated and depend upon high-quality data from suppliers. Suppliers must believe that this data will not be misused against them.

5. Favor an Incremental Approach

Start small with selective outsourcing for a new supplier.

Giving a large chunk of business to a new, untested supplier is risky and makes it difficult for your company and supplier to learn how to work together. Once you have a capable network of suppliers who can truly collaborate on product development and manufacturing improvement, you do not want to contaminate the network with inferior suppliers. When you introduce a new supplier, you can start to train them in the lean way from the start, beginning with a small order. Test them on a less critical component and let them earn their way into the network.

At the Toyota Technical Center they gave the example of headlamps for vehicles. They would not source an entire headlight to a brand new supplier but instead started with fog lights. Valio, a French supplier with operations in North America, was first given a fog lamp and was trying to get headlights. At first, Toyota did not think they were ready for it. But Valio started performing well and being considered for headlamps for the next new model introduction.

An example of a failed Toyota project was a rear headlamp given to an American company selected by purchasing because of its low bid. As it turned out, it could bid that low because it intended to build the part at a Mexican plant to take advantage of the low labor rates. This Mexican plant had never been tested to make Toyota parts. Once they got manufacturing in place, they experienced off-the-chart scrap rates for the parts. The Toyota engineers who had recommended a different supplier based on engineering and manufacturing capability were furious. Even though Toyota was not paying for the repair costs, and the supplier still wanted the business and was willing to continue at the low price point, Toyota decided to give the business to someone else. It cost a bit more, but it was worth it to get a reliable flow of quality headlamps to the assembly plant. To Toyota, this became an object lesson in the folly of chasing low prices across national borders.

6. Develop Mechanisms for Joint Enterprise Learning

Learn together and capture learning in standardized routines.

The highest level of the lean enterprise occurs when partners in the enterprise are learning together and capturing the learning in standardized processes. You don’t get to this level overnight. You can imitate Toyota’s supplier association and find it’s just one more meeting or one more visit between the customer and the supplier. In fact, this was often what Toyota’s supplier association in America looked like in the early days. It was only when Toyota started to show it could add value to suppliers through improvement programs that the supplier association began to be viewed as a true source of learning and improvement.

A better structure to imitate at first than the supplier association is the jishuken activities of Toyota. Take three to five of your top suppliers that are not in a competitive relationship and form a kind of user group that works on projects in a plant from each company. Everyone learns and the plants get better.