Toyota's management system, more formally known as the Toyota production system (TPS) is one of the most bench-marked business improvement strategies in modern industry. While many companies try to emulate Toyota's success using a variety of different approaches, most practitioners are not aware how Toyota replicates TPS at suppliers.
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Toyota’s Management System
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The global automotive manufacturer Toyota, is one of the founders of the Toyota Production System (TPS), which was an early version of the Just In Time (JIT) inventory system, which allows Toyota to have the exact number of components needed at any time in order to continue with its operations, avoiding the waste that commonly results when components get inventoried and stored.
Just-in-time (JIT) inventory management, also know as lean manufacturing and sometimes referred to as the Toyota production system (TPS), is an inventory strategy that manufacturers use to increase efficiency. The process involves ordering and receiving inventory for production and customer sales only as it is needed to produce goods, and not before.
The Just-in-Time (JIT) principle basically means to produce the necessary units in the necessary quantities at the necessary time. It is vital for such system to work on a zero defect basis. Prerequisite of JIT delivery is hejunka principle, which ensures a leveled capacity and personnel utilization, excluding both peak loads and downtime due to thorough planning, continuous visual control.
This type of inventory management provides many benefits, but is not without its downsides, and relies heavily on factors such as a strong, fast and efficient network of suppliers.
Supplier selection process that could be implemented at Toyota manufacturing company.
Since JIT requires manufacturers to be very accurate in forecasts for the demand of their products; the Toyota motor company has developed some basic principles that guides its supplier selection process with a view to optimize its purchases and to manage its car manufacturing operations on five different continents:
Fair competition based on an open door policy, Toyota is open to any potential supplier regardless of nationality, size or whether the company is a first time supplier or not. Toyota’s corporate with suppliers is solely based on business critical parameters i.e quality,cost,technology capabilities and reliability regarding the on-time delivery and ability to implement Kaizen strategy.
In a JIT supply chain, reliable suppliers will reduce supply uncertainty and make the supply chain more effective, therefore supplier selection is crucial because Toyota’s purchasing contract stipulates that suppliers must abide by all changes in delivery schedules or incur direct temporary suspension of scheduled shipments.
Hence, JIT environment requires a slightly different mindset for selecting suppliers who can survive in JIT supply chain long term. Stevenson suggest that the selection and evaluation of supplier’s ability to deliver in JIT supply chain should be based upon the following JIT quantitative & qualitative supplier selection factors:
Delivery of a quality product, delivery on-time, frequent deliveries, delivery in small quantities, delivery of exact quantities, supplier’s management policy and philosophy, willingness and openness to share data and information, attitude towards partnership, willingness to undertake continuous improvement, desire to develop new products and ease of communication at all levels.
Keeping in mind that the ultimate goal is a win-win situation for the supplier and manufacturer; open and transparent communication is extremely important in selecting the right suppliers and the following supplier selection process could be used to help meet the consumer demand.
Step 1 – Supplier Selection Scorecard
The first step in the supplier selection process is to create a supplier selection scorecard. The supplier selection scorecard contains all the important elements you require in a supplier. Your scorecard should be quantifiable and include: Supplier characteristics, the important strategic alignment factors you value, applicable business policies, any constraints management directives, government regulations, contracts already in place, and other commitments
At this step, make sure you are prioritizing your needs. A key criterion in selecting the right supplier is value. Cost should not be the lone driver; you should instead look at the total cost of ownership, which looks at the supplier’s:
• Customer service
• Delivery commitments
• Reliability and responsiveness
• Resource savings (hard and soft)
Step 2 – Identify Suitable Suppliers
Once you have the selection criteria in place, you must create the pool from which you will select a supplier. Next, gather information from the identified suitable suppliers, do the scorecard ranking, perhaps in the form of a Request for quote (RFQ) or Request for proposal (RFP). Tabulate the information you collect and use the scorecard to rank the potential suppliers. Depending upon the complexity and/or criticality of the product or service.
Step 3. Measuring Supply Performance
Another important step of the supplier management process is developing an audit and assessment program. Best-in-class supplier programs conduct audits throughout multiple stages of the manufacturer/supplier relationship. You should always conduct an audit before the contract is signed to confirm that the supplier does not have any significant compliance or quality system failures that could affect your ability to produce top-quality products. Another reason to conduct the audit beforehand is to understand the supplier’s strengths and weaknesses before the relationship becomes official.
Even after the contract is signed, you should continue auditing, basing the frequency of the audits on the criticality of the supplier. To determine the frequency, all suppliers should be categorized into a level of risk or importance. This prioritization will help you be smarter and more effective with your resources and place a higher focus on your important, high-risk suppliers, while continuing to monitor second-tier suppliers. Beyond an established audit program, you should continuously monitor and assess each supplier’s performance. You can track positive or sustained strong performances, as well as negative trends.
Step 4 – Negotiate
After you have narrowed the list to a manageable number of best options, possibly just one, let the negotiations begin! Depending on the criticality of the good or service, you may negotiate with just the top supplier on your scorecard, even if others remain on the list of potentials.
These others, of course, are not told they are not #1 until after you have completed negotiations and agreements are completed.
Based upon the complexity of the situation, lawyers may be involved.
Step 5 – Create Contract
Once an agreement is reached, a contract is created and signed. Creating the purchase order will include activating your procurement system. This should be a standard operating procedure and include getting your accounts payable process ready to process the supplier invoice.
Step 6 - Achieving Certification
As your supplier relationship grows stronger, and both parties feel they are receiving positive performances, the supplier may be able to achieve a certified status. This occurs when you establish a set of selected criteria to be met by your suppliers. Certification must be obtained with sustained successful performance and can be lost with poor performance or a negative compliance outcome from an audit.
As the relationship continues to grow, the supplier also will become more integrated into your manufacturing process.
Evolution of Toyota supplier relationship management.
A competitive advantage exists for companies that are engaged in successful long-term buyer-seller relationships (Anderson and Narus, 1990).This makes it important for companies to understand what factors influence their relationships with other firms.
The factors that influence relationships are reputation, performance satisfaction, trust, social bonds and comparison level of the trust, mutual goals, power/interdependence, cooperation and commitment. An identification of the relative influence of these factors has been used to focus Toyota’s efforts on the areas that are most important, improving the sustainable competitive advantage derived from that relationship (John, and Nevin, 1996).
Toyota started using JIT inventory controls in the 1970s but because of its relationship with suppliers it took more than 15 years to perfect its process. The JIT inventory system represents a shift away from the older "just-in-case" strategy, in which producers carried much larger inventories of stock and raw goods, in case they needed to produce more units because of higher demand. "Just in case" inventory management paid no much attention to suppliers because inventory was always in bulk.
The Toyota Production System (TPS) is not only a technology of comprehensive production management, but a legendary sylphlike philosophical concept of lean production developed to improve productivity and quality (Kotani, 2007). Its basic idea is to maintain ceaseless flow of products agile to changes in demand.
Toyota this time sends off orders to purchase production parts only when it receives new orders from customers.
Trust is a fundamental relationship model building block and as such is included in most relationship models. In a JIT system trust becomes paramount as delivery schedules and quality of incoming material holds the key for the success of the system.
Toyota realised that mutual goal is a degree to which partners share goals that can only be accomplished through joint action and the maintenance of the relationship. These mutual goals provide a strong reason for relationship continuance. (Soni and O’Keeffe, 1994) suggest that mutual goals influence performance satisfaction which, in turn, influences the level of commitment to the relationship.
Shared values are similar but broader concept. (Morgan and Hunt 1994) define shared values as, "the extent to which partners have beliefs in common about what behaviors, goals and policies are important, unimportant, appropriate or inappropriate, and right or wrong." Most likely mutual goals encourage mutuality of interest and it then becomes possible for both parties to achieve those goals. Goals can be better measured as compared to values and norms.
Engaging in long-term relationships with suppliers includes a wide range of benefits. Ellram (1991) identified potential advantages of forming partnerships based on some of the early literature and observations of company experiences, namely management advantages, technology advantages and financial advantages.
Partnering with suppliers or developing close relationships can enhance planning and information sharing, improved resource savings and stabilize cost through long term commitments and contracts that Toyota has now. Close ties with suppliers can also lessen risk associated with changing markets and volatile business conditions. One of the primary advantages of building relationships with suppliers is that suppliers are more willing to share technology and offer their support, knowledge and experience.
Mutual benefit based on mutual trust; Toyota believes in developing mutually beneficial long term relationships with suppliers based on trust and confidence.
As a basic rule Toyota expects its suppliers to excel in quality , cost delivery, technology and management. However, just-in-time (JIT) is more than an inventory system. JIT manufacturing is a philosophy by which an organization seeks continually to improve its products and processes by eliminating waste (Ptak, 1997). Organizations wanting to use the JIT approach to manufacturing must have several building blocks in place. These building blocks were first established in the early 1950s by T. Ohno, former Executive Vice President of Toyota Motor Company (Ansari and Modarress, 1990).
Toyota and JIT manufacturing will succeed as long as the company maintains a steady production rate, with high-quality workmanship and no machine breakdowns at the plant that could stall production. Additionally, it needs reliable suppliers that can always deliver parts quickly, and the ability to efficiently assemble machines that put together its vehicles.
Considering that Toyota targets processes, rather than whole systems, in assisting suppliers to be more effective at JIT management. Findings also show that Toyota's approval process doesn't necessarily support major kaizen at suppliers yet does encourage minor day?to?day kaizen. Selecting the suppliers who can meet your consumers’ demand for higher-quality materials may bring some initial costs, but it will pay off over time through consistent, high-grade products.
Developing a supplier relationship management program can be a complex and upfront investment. However, once you choose to build strong relationships with reliable suppliers, you will have peace of mind, knowing you’re delivering high quality to your consumer
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