An Analysis of Toyota’s Strategic Procurement and Supply Chain Management

Purchasing & Materials Management| | Strategic Procurement & Supply Chain Management| Introduction The topic selected is (Strategic Procurement & Supply Chain Management). For this study, we have selected Toyota Motor Corporations as our company of choice. Toyota is without doubt the best in the world, with its many philosophies and principles on how to make the best out of the least; JIT, lean production and elimination of waste and the desire for continuous improvement are just a few ways how Toyota has become the best in the auto industry.

Toyota as a name, a company, and as a brand has become synonymous with Quality. At the heart of its success, lie family values that have been passed down; a norm that has become the Organizational Culture of Toyota – The Quest for Excellence, and The Passion to Lead. Toyota’s achievement of excellence stems from implementing lean production, or which they refer to as ‘The Toyota Way’. The most visible product of Toyota’s quest for excellence is its manufacturing philosophy, called the Toyota Production System (TPS).

We have selected to apply this topic to Toyota, because to perfect their way of lean production, they work on it from the root; i. e. their suppliers, and purchasing strategy. Scope of Project Analyzing the strategies of Toyota, and how they implement it in their purchasing and procurement policy. Also, analyzing how Toyota selects it suppliers and what selection processes do they go through; and also conducting an analysis of Toyota’s supply chain and its supply chain management. Limitations This study was really difficult to attain, as personal interviews or nteractions with Toyota’s direct employees was beyond our budgets to conduct. This study is a result of hard work and extensive internet and textual or written research from more than ten websites and three books. Also, the study of Toyota was too large and very difficult to summarize into the limited requirements of this paper. Company Background The Toyota Motor Co. Ltd was first established in 1937 as a spin-off from Toyoda Automatic Loom Works, one of the world's leading manufacturers of weaving machinery. The Toyoda Automatic Loom Works was then headed by Japan's "King of Inventors" Sakichi Toyoda.

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The patent rights to one of his machines had been sold to Platt Brothers (UK) and provided the seed-money for the development and test-building of Toyota's first automobiles. August 2007 marked the 70th anniversary of TMC. The fledgling company founded by Kiichiro Toyoda, Sakichi's son, has since blossomed into the leader that it is today. In 1950 the company experienced its one and only strike. Labour and management emerged from this stoppage firmly committed to the principles of mutual trust and dependence, and that corporate philosophy still guides T0oyota’s growth today.

Production systems were improved in the late 1950s, culminating in the establishment of the 'Toyota Production System. ' It became known as TPS in 1970 but was established much earlier by Taiichi Ohno. Based on the principles of Jidoka, Just-in-time and Kaizen, the system is a major factor in the reduction of inventories and defects in the plants of Toyota and its suppliers, and it underpins all of Toyota’s operations across the World. Toyota launched its first small car (SA Model) in 1947.

Production of vehicles outside Japan began in 1959 at a small plant in Brazil, and continued with a growing network of overseas plants. Toyota believes in localizing its operations to provide customers with the products they need where they need them; this philosophy builds mutually beneficial long-term relationships with local suppliers and helps the company fulfill its commitments to local labour. Over and above manufacturing, Toyota also has a global network of design and 'Research and Development' facilities, embracing the three major car markets of Japan, North America and Europe.

In every community in which the company operates, Toyota strives to be a responsible corporate citizen; close relationships with people and organizations in the local community are essential contributors to mutual prosperity. Across the world, Toyota participates enthusiastically in community activities ranging from the sponsorship of educational and cultural programmes to international exchange and research. Toyota has the fastest product development process in the world. New cars and trucks take 12 months or less to design, while competitors typically require two to three years.

Toyota is benchmarked as the best in class by all of its peers and competitors throughout the world for high quality, high productivity, manufacturing speed, and flexibility. Toyota automobiles have consistently been at the top of quality rankings. Strategic Analysis To better understand a firm and its placement of its strategies, we must conduct an analysis of factors that might affect its selection of strategies. SWOT Analysis Strengths * Toyota Motor Corporation is the world’s largest vehicle manufacturer by production and sales. * Toyota is best known for environmentally safe, quality, reliability, durability and value for money. Toyota’s Camry and Corolla have been the top-selling cars in their respected categories; in the past eight out of nine years. Also, Toyota produces the globe’s best selling hybrid car, the Prius – which by 2010 had surpassed two million sales worldwide. * Strong distribution and marketing efforts focused on meeting diverse needs, high quality sales and services, and close involvement with customers. * Low cost, high quality factory operations guided by just in time. * Toyota maintains long-term partnerships with suppliers, and strategic partners. Toyota holds the competitive edge of being the undisputed quality leader in automotive marketing. * Strong brand equity. * Diversified product portfolio (Lexus, Daihatsu, Hino) leading to increasing customer base. * Toyota’s success allows it to invest heavily in Research and Development and in the future. Weaknesses * From the last quarter of 2009 through to the 1st quarter of 2010, Toyota had recalled more than 8 million cars and trucks globally in numerous recall campaigns, and temporarily stopped production and sales. * Toyota was badly hit by the 2008 financial crisis, and declared its first annual loss in its 70 years history. Toyota does not have detailed customer segmentation * Customers are not involved in the process. * Toyota places a very high level of responsibility on employee shoulders. * After the 2009-2010 recall crisis, Toyota was criticized for not having or employing enough PR staff, and that it was not able to manage its Customer Relations. Opportunities * Joint ventures with French motoring companies Peugeot and Citroen has provided various opportunities for the company to produce cars in France. * North American consumers have shifted to more fuel-efficient and higher quality products of the European and Japanese automakers. Produce fuel-efficient, higher quality and smaller automobiles that can attract the consumers in developing and poor countries. * There is a growing demand for hybrid electric cars. Threats * Rising oil prices and other car maintenance costs, leading to decrease in car ownership. * Encouragement from governments and pressure from environmentalists to turn to more environmental friendly methods of transportation (e. g. cycling and public transportation) * Escalating competition in the low priced car market by the entrance of several newly industrialized countries. Continuing trade frictions due to trade imbalances between Japan and other countries and the lack in openness of the Japanese market to import. * Declining economic growth on a global scale. * Major producers, including the Big Three of U. S (G. M, Ford and Chrysler) offered significant discounts across their lineups. PESTLE Analysis Political The auto-industry is being pushed into a socio-politico-economic corner. Carmakers are regularly being restricted with new laws or policies or requirements; that they must adhere to. Toyota likewise is linked closely to the policies of the government.

Not only this, but emerging countries, that are keen to develop an auto sector are putting political pressure on Toyota, so as to protect it and develop it. Economic Toyota Company is a pillar company in the auto mobile business, a flag of economic progress. The Toyota Company has been a core company, a unique phenomenon, which has dominated the twentieth century. However, the automobile industry, including Toyota Company has suffered a series of structural problems and has become riddled with contradictions and economic discontinuities; including the recent financial crisis. Social

As part of the development in automotive industry, the Toyota Company actually affects the society as a whole. It employs millions of people directly, and tens of millions others indirectly. Its products have transformed society, bringing unbelievable levels of mobility and changing the ways people live and work. Nearly since its startup, Toyota has been a model of social discipline, control and improvement and it is not just the auto sector, where it has left a mark. Toyota is considered a role model in millions of organizations and institutions worldwide. It has with its culture been the example that professors use in every business school.

Technological Toyota works on a brilliant scale and has such a vast influence that it is impossible to miss. Due to continuous improvement in demands, the level of technology that Toyota has to implement is increasing, and this adds to the challenges of heavy investment burdens on its R&D, and increases its uncertainties and risks in developing the technologies. Technologically, the automotive industry is becoming increasingly competitive. Legal Toyota is subject to a multitude of rules and regulations, as well as laws and legislations of a more legal nature.

These laws and legislations cover areas such as competition law, intellectual property law, taxation, consumer protection law and emissions. Environmental Transportation through automobiles consumes a lot of the earth’s precious resources. Also to include as environmental issues are the network of roads that are made for the running of automobiles. The forests or ecosystems that are destroyed to make those roads are also environmental issues. Also, the extraction of oil as a usage of fuel; all are environmental costs. Another environmental cost is the extraction of raw materials that go into the making of these automobiles.

Indirectly the automotive industry brings people congestion, pollution, traffic accidents and fatalities and a wave of other environmental troubles. Due to this, Toyota needed to establish R&D centres to take advantage of research infrastructure, human capital and technical and technological knowledge, so they can develop vehicles to satisfy the requirements of the environmental and safety regulations more effectively. Toyota’s Core Competencies Toyota has several core competencies which they could utilize to further gain advantage over their competitors. In January of 2009, Toyota overtook the U.

S. auto giant General Motors, to become the market leader in the automotive industry. One core competency of Toyota is their brand management. The strength of their automotive marketing has been such that their brand is known even in the parts of the world where cars are not the common medium of transportation. Another core competency is their supply chain management, which shows their ability to maintain a steady stream of raw material coming in for production, because of their long-term good relationships with their steel, glass, plastics and other raw material suppliers.

Another thing that forms part of their core competencies is their highly coordinated logistics system, which is outsourced; and leads to excellent inventory management and always on schedule production activities. Another major core competency of Toyota is their ability at the moving assembly line. Not only this; The Toyota Way of lean production, its JIT and TQM approach; all are part of its core competencies. Being the pioneer of such mass production and waste elimination system, they were able to get ahead of the competitors manufacturing process-wise and were also able to save on cost and time.

Yet another core competency is Toyota’s focusing on its product development technology under a single product-information-management program through standardizing and incorporating them; thus highlighting Toyota’s work and effort on the development of sustainable production, and their commitment to perform environmentally. Toyota and its suppliers Toyota has basically 14 management principles, which combine to make ‘The Toyota Way’. Of those 14 principles, Principle 11 states that: “Respect your Extended Network of Partners and Suppliers by Challenging Them and Helping Them Improve”.

This is merely a small sentence, but is more than enough to illustrate the importance of its suppliers to Toyota, and how it sees them as strategic partners and a part of its organization. Toyota in its early days was very small, and didn’t have a lot of business or production. It didn’t have the resources, capital or equipment to design and make the myriad of components that go into the making of a car. Toyota’s offer to its suppliers was small. It was the opportunity for all partners to grow the business together and mutually benefit in the long term.

So, like the associates who work inside Toyota, suppliers became part of the extended family who grew and learned the Toyota Production System. Even when Toyota became a global powerhouse, it maintained its supplier partnerships. One way that Toyota has honed its skills in applying TPS is by working on projects with suppliers. Toyota needs its suppliers to be as capable as its own plants at building and delivering high-quality components just in time. Moreover, Toyota cannot cut costs unless suppliers cut costs, lest Toyota simply push cost reductions onto suppliers, which is not the Toyota Way.

Since Toyota does not view parts as commodities to be sourced on the market through open bidding, it is critical that it works with highly capable suppliers that are following TPS or an equivalent system. Toyota’s purchasing department has its own quality and TPS experts to work with suppliers when there are problems. Toyota pays careful attention to its suppliers and their performance. It provides ample hands-on assistance and monitoring to avoid problems; or in the case of an occurrence of a problem, to correct it as soon as possible.

If problems do occur, Toyota sends a team of its experts to address the problem and to create the action plan. Whereas other companies would threaten problem suppliers—“Fix the problems or we will drop you”—Toyota nurses them out of their “sickness” in a very holistic way. There are several advantages for Toyota in treating suppliers as strategic partners or part of the Toyota family. First of all Toyota’s JIT system is a practiced specimen, of how important and beneficial supplier relationships truly are. This system would have never been truly effective if successful integration with suppliers had not taken place.

Parts and components arrive just when they are needed and hence Toyota saves on storage and warehouse costs. Toyota’s suppliers are integral to the just-in-time philosophy, both when it is working smoothly and when there is a breakdown in the system. Toyota also saves money on its logistics, and this as well roots from careful integration with suppliers. Also the TQM system of Toyota can be traced back to Toyota’s supply chain management. Toyota outsources almost 70% of the components that go into its cars, and it maintains close relationships with its key suppliers, so as to procure quality parts and components.

Toyota has been rewarded time and time again for its serious investment in building a network of highly capable suppliers that is truly integrated into Toyota’s extended lean enterprise. Much of the award winning quality that distinguishes Toyota and Lexus results from the excellence in innovation, engineering, manufacture, and overall reliability of Toyota’s suppliers. Toyota’s Purchasing Strategy Toyota’s Purchasing/Procurement Policy The ultimate objective of Toyota is to produce vehicles that fully satisfy the customer.

To this end, Toyota has developed three basic principles that guide its relationship with suppliers with a view to optimizing its purchases in a global context. These principles are the following: i) Fair competition based on an open door policy Toyota is open to any potential supplier, regardless of nationality, size or whether this company is a first-time supplier or not. Toyota’s co-operation with suppliers is solely based on business considerations, which include an assessment of the overall economic and technological capacities of the potential supplier.

Critical parameters of this evaluation are quality, cost, technological capabilities and reliability regarding the on-time delivery of the required quantities of inputs, as well as the entrepreneur’s ability to implement a kaizen strategy, which means the continued improvement and enhancement of products, services and management. ii) Mutual benefit based on mutual trust Toyota believes in developing mutually beneficial, long-term relationships with suppliers based on trust and confidence. Close and wide-ranging communication with them is considered a key factor in building and maintaining trust. ii) Contribution to local economic development through localization and good corporate governance As part of the on-going globalisation efforts, Toyota is relocating a larger part of its production to other countries. It is its objective to contribute to the host country’s economic development in line with Toyota’s market presence by purchasing parts and other inputs from local suppliers. This is a Flowchart of the Toyota’s Purchasing Process Toyota’s Supply Chain Management Toyota’s Supplier Consideration and the Selection Process At Toyota, choosing a supplier is a long, drawn-out process that involves erifying 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. As a basic rule, Toyota expects its suppliers to excel in quality, cost, delivery, and engineering, including technology, and management. These are the five key areas that shape competitive entrepreneurs and make them successful in a competitive environment.

Thus, Toyota requires suppliers to maintain consistently high quality levels which can be measured in terms of the number of defect parts per million. In addition, suppliers need to build and to maintain a strong position regarding unique designs or special technologies, while being cost- competitive. They also need to follow and to monitor trends in information technology and be able to harmoniously amalgamate state-of-the-art technology with their business organization. It is often necessary that potential suppliers undergo a preparatory process before entering a business partnership with Toyota.

During this period, the management should attach particular emphasis on the following issues: * Encouragement of an enterprise culture of creativity, continuous learning and improvement; * Particular attention on R & D, which should go beyond technological issues to include an analysis of both customers’ needs and competitors’ competitive potential; * Improvement of employees’ satisfaction in order to promote creativity and strengthen organizational development; * Strengthening the management information system to help executives to take informed and effective decisions.

Toyota views new suppliers cautiously and gives only very small orders. They must prove their sincerity and commitment to Toyota’s high performance standards for quality, cost, and delivery. If they demonstrate this for early orders, they will get increasingly larger orders. Toyota will teach them the Toyota Way and adopt them into the family. This is a model of what Toyota expects from its suppliers. Toyota’s suppliers have to show excellence in areas that Toyota sees as critical. These areas are cost, delivery, engineering, management and quality.

Toyota’s philosophy is that suppliers have to excel in these areas if they wish to stand out amongst other suppliers and to be successful with global competitiveness Tiered Supplier Organizations Toyota like many auto carmakers is a network of suppliers. Tier 1 suppliers are Toyota’s direct suppliers, which is followed by Tier 2 suppliers and so on. Lastly, there are the Tier 4 suppliers. These are generally small in size, but are critical to the suppliers that are supplying Toyota. Toyota, to maintain the smooth flow in its supply chain, even handles when problem exist in these Tiers.

An example of this can be 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. Toyota chooses suppliers across multiple tiers so as to guarantee availability of innovative solutions across the supply chain.

Pressure on Suppliers to Perform Toyota’s suppliers are always at their toes. They do not get complacent or feel that they can ease-out, even if they are considered as Toyota’s trusted suppliers and have been supplying Toyota quality materials for a number of years. Even suppliers who have acquired long-term contracts from Toyota, for supplying specific components for a model or set of models have to prove that they are worth the trust to have been given the contract. Otherwise they would jeopardize their opportunity of continuing as Toyota’s suppliers or risk not acquiring such a contract in future models.

The depth of Toyota’s Supplier Relationship Toyota’s suppliers 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 Assisting and Helping Suppliers

A key feature of Toyota’s supply chain is the automaker’s role in supplier capability development. This point has already been addressed earlier in this project, how Toyota provides assistance to its suppliers and helps them learn. 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. 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. The Toyota Target Value System The Toyota Target Value System is a complex system that is continuously applied in Toyota-supplier relationships.

Under this system, Toyota and a supplier agree on a number of long-term issues and objectives to strengthen the supplier’s competitiveness. In the course of intense consultations, the long-range objectives are scaled down to annual targets, the so-called “target values”. On this basis, the supplier undertakes appropriate steps and measures to reach these goals as agreed. Progress is regularly evaluated in terms of organization, effort and achievement and the assessment is communicated to the supplier. Suppliers that succeed in raising their levels of competitiveness receive awards.

In case suppliers experience difficulties in their efforts to attain the agreed targets, Toyota provides expertise to analyze the problems and to design measures to remedy the situation. The continuing circle of improvement, attainment and further improvement enables suppliers to improve their competitive edge, while laying the foundation for a stable and long-term business relationship with Toyota, as well as for a broadened range of business opportunities. This long-term approach also helps to overcome problems emanating from economic recession and turmoil.

Environmentally-Friendly Products Based on “Green Procurement” In order to produce environmentally-friendly products, Toyota aims to procure parts, materials and equipment that have low environmental impact from suppliers that always give sufficient consideration to the environment. Toyota’s Supplier Strategies: Strengths and Weaknesses Strengths Suppliers are considered part of Toyota’s value chain. Having strong relationships with partners provides Toyota with certain advantages. Its lean production methods are directly integrated with the efficiency of suppliers.

The advantages that Toyota acquires of its supplier strategies include the inventory that Toyota receives JIT from its suppliers. Toyota’s suppliers work hand in hand with Toyota to improve processes and the quality of its products. These supplier strategies also help Toyota shed its costs. The work that Toyota has done with its suppliers has helped the suppliers in eliminating waste from their factory floors; shedding cost and getting the best out of the least. All these savings and reductions in costs are passed on to Toyota as low priced – high quality parts and components.

These supplier strategies have also increased Toyota’s quality, and have decreased defects to a bare minimum. Another visible advantage of Toyota’s supplier strategies is that the company has decreased its time-to-market for its new or developing products. Suppliers respect Toyota and share common interests and mutual benefits with Toyota. These strong ties also help improve Toyota’s insight on the occurrence of problems and avoiding them, as it goes beyond just handling its direct suppliers; in fact it also deals with its Tier 2, Tier 3 and Tier 4 suppliers.

Also, Toyota’s decision to select most of its suppliers that are geographically located near to it, also helps solve logistics problem and brings a large reduction in the cost of transporting the parts or components to its plants. Weaknesses (Toyota has a very studied and planned organizational structure. Its departments are perfectly set and planned. We as students did not have the ample resources to conduct a study on the weaknesses of Toyota – so what we mention here are just assumptions. ) Recent recalls that Toyota has suffered, have been to some extent blamed on its suppliers and Toyota’s Supplier Management.

There is a wide speculation that since Toyota, after overtaking GM as the largest auto manufacturer set its goal to increase its market share from 11% to 15%. Due to this Toyota lost sight of its core philosophies, and grew complacent in its supplier selection process. Thus, summarizing that Toyota is only as good as its network of suppliers. Denso, a core supplier of Toyota, which conducts more than 30% of its business with Toyota is said to be somewhat frustrated with the closeness that Toyota maintains with it. This is due to the reason being that Denso also supplies to other customers which are also car manufacturers.

These customers are namely Honda, Nissan and Mazda etc. and are considered by Toyota as its main competitors; especially Honda and Nissan. These deviating relationships might possibly hurt or damage Toyota in the long run; if corrective measures are not taken. Also, some suppliers complain that although Toyota is their best customer, it doesn’t let go of its bargaining power; meaning that Toyota keeps an upper hand over everything. It can also be argued that having low inventories, if not managed well can cause problems in the production line.

Corrective Actions Required Knowing how Toyota works, if these problems come into existence; Toyota will have a carefully planned approach to solving them. To begin with Toyota would first clarify the problem and see the comparison between the current and the ideal or required state. Then as second step, it would grasp the actual situation and see the gaps, which have caused the problem to occur. A third step would be to break down the problem and set targets to correct them bit by bit. Finally, it would conduct an analysis of the underlying causes.

What Toyota should do to prevent the problems mentioned in the (Weaknesses) section above is that Toyota must improve its supplier management process and make some corrections to its supply chain. Conclusion Japanese carmakers have always been considered the benchmarks in their industry, and Toyota is the best among the Japanese car manufacturers, establishing it as the benchmark of benchmarks. Toyota has excellence embedded deep in its core and has helped and developed its suppliers to do the same, by integrating and applying a scope of mutual learning and development.

Fun Fact As a full stop to this project, we would leave you with a fun fact to think over. Today, Toyota is the world's largest manufacturer of automobiles in unit sales and in net sales. It is by far the largest Japanese automotive manufacturer, producing more than 10 million vehicles per year, equivalent to one every six seconds. In the time it has taken you to read this paragraph, Toyota would have produced at least another three or four cars! Resources Books 1. TOYOTA SUPPLY CHAIN MANAGEMENT: Ananth V. Iyer, Sridhar Seshadri and Roy Vasher 2.

THE TOYOTA WAY – 14 Management Principles from the World’s Greatest Manufacturer: Jefferey K. Liker 3. THE TOYOTA LEADERS – An Executive Guide: Masaaki Sato Online Resources and Websites 1. http://www. economist. com/node/15576506 2. www. toyota-industries. com 3. http://www. strategicsourceror. com/2011/04/toyota-supply-of-cars-will-be-impacted. html 4. www. toyota-global. com 5. http://blogs. gxs. com/morleym/2010/02/improving-visibility-across-toyota%E2%80%99s-supply-chain. html 6. http://thethrivingsmallbusiness. om/articles/what-can-we-learn-from-the-toyota-crisis/ 7. www. businessweek. com 8. http://www. toyota. co. nz 9. www. toyotasupplier. com 10. http://www. industryweek. com/articles/toyotas_real_secret_hint_its_not_tps_13432. aspx 11. http://www. autoweek. com/article/20060818/free/60816004 12. www. inc. com 13. http://www. businessweek. com/bwdaily/dnflash/content/jan2010/db20100128_907800. htm 14. http://www. bnet. com/blog/mba/lessoned-learned-from-toyotas-crisis/1939 15. http://findarticles. com/p/articles/mi_m0KJI/is_10_118/ai_n27023150/

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